Download DETERMINANTS OF PREMIUMS PAID IN EUROPEAN BANKING

DETERMINANTS OF PREMIUMS PAID IN EUROPEAN BANKING MERGERS AND
ACQUISITIONS
Belén Díaz Díaz (∗)
Sergio Sanfilippo Azofra
Departamento de Administración de Empresas
Universidad de Cantabria
Avda. de los Castros s/n
39005 Santander - SPAIN
Tel: + 34-942201660 - Fax: + 34-942201890
e-mail: [email protected], [email protected]
∗
Contact author
DETERMINANTS OF PREMIUMS PAID IN EUROPEAN BANKING MERGERS AND
ACQUISITIONS
ABSTRACT
This study aims at analysing the determinants of the premium paid in European banking mergers
and acquisitions (M&A). This analysis will highlight the reasons for the bank M&A wave during the
1990s.
The empirical study analyses a sample of 81 European banking mergers and acquisitions from
1994 to 2000.
The results show that there are different variables that make the target bank attractive for the
acquirer, such as the percentage of equity, the percentage of loans and financial profitability. However,
geographical and product diversification have not been considered by the acquirers as a reason to pay
higher premiums. Moreover, when analysing a sub-sample of savings banks and cooperatives, it is found
that M&A deals have been used as a protection measure to avoid being acquired, since these acquisitions
aim at attaining a great size, what implies higher premiums are paid for mergers between equals, for
acquisitions of higher banks and by those who show lower growth.
Key Words: premiums, banking mergers and acquisitions.
JEL Classification: G34, G21
1
1. INTRODUCTION AND MOTIVATION
Both economic and regulatory changes have deeply transformed the financial sector in recent
years. Developments in assets markets, disintermediation, deregulation, financial innovations and the
growing technological possibilities are some of the key factors which have enhanced liberalization and
competitiveness of the sector.
Within this context, mergers and acquisitions (M&A) are considered to be the response of
financial institutions to such recent changes (Berger, Demsetz and Strahan, 1999). An increase in
transactions of this kind can be found both in the United States and in Europe during the 1990s. In
particular, the number of M&A deals carried out by European financial institutions increased from 330 in
1990 to 1,072 in 2000. On the other hand, the number of M&A deals by credit institutions increased from
97 in 1990 to 269 in 2000 (Source: Thomson Financial).
In Europe, such increase in M&A deals is also due to two essential factors. First, the Second
Banking Coordination Directive
1
has enhanced financial liberalization, introducing more lenient
restrictions to the spread of financial institutions to other member states of the EU. Second, the creation of
the European monetary union by the introduction of the single currency. The single currency improves
markets integration, which in turn means business reorganization becomes more attractive, as it offers the
possibility to take advantage of new opportunities. It also represents a way to protect domestic markets
from international competitors (Campa and Hernando, 2002).
However, profits from M&A deals are still confusing, despite such increase in the number of
transactions of this kind2. On the one hand, studies carried out to analyse abnormal return for the
shareholders of the institutions involved in an M&A have showed mixed results. Most previous works3
have showed a positive abnormal return for the target institution, but negative or not significant results for
the acquirer. On the other hand, studies analysing the influence of M&A deals on profitability or
efficiency of institutions have proved inconclusive as well. Some studies find the banks acquiring other
credit institutions increase their efficiency (Akhavein, Berger and Humphrey, 1997) or market-to-book
value ratio (Cyree, Wansley and Black, 2000). Others do not find considerable profits to be gained
through M&A deals, as they do not find a significant influence of acquisition on efficiency (Berger and
1
Such directive liberalized the financial services commerce within the EU by the introduction of the
“single banking licence” and established the universal character of banks in the EU.
2
See Rhoades (1994) and Piloff and Santomero (1998) for a revision of existing literature regarding this
point.
3
See Campa and Hernando (2004).
2
Humphrey, 1992; DeYoung, 1993 and Peristiani, 1997) nor profitability (Srinivasan and Wall, 1992;
Linder and Crane, 1992 and Pilloff, 1996) for the institutions involved.
Within this context, studies on the price paid for M&A transactions becomes specially
significant, since lack of profits in such transactions could be due to the high premium paid for the
acquisition, which could put the solvency and stability of the institution at a risk. In fact, 75% of hostile
takeovers carried out from 1985 has not succeeded because of the premium paid. This influenced the fact
that such transactions decreased from about 22% of total takeovers in 1987 to less than 10% in 1998
(Cuervo, 1999).
In particular, this study aims at analysing determinants of the premium paid for M&A deals
carried out by European credit institutions. A major understanding of the factors determining such price
could help us to find those characteristics of the target institution and its correspondent market that seem
more attractive for the acquirer. This in turn could help us to find the reasons for the wave of financial
mergers and acquisitions that took place during the 1990s (Rhoades, 1987). This analysis will also show
how continuation of transactions would affect the banking sector.
However, the premium does not only depend on how attractive the target institution is
considering its potential value, but also on the financial capacity of the acquiring institution. As a result,
the analysis will consider both the characteristics of the target and the acquiring institutions.
This study will allow us to eliminate some of the limitations found in previous works aiming at
analysing the determinants of the premium paid for banking acquisitions or at analysing the reasons for
M&A deals.
First, conclusions of previous works on premium determinants can be influenced by the
geographical area where the M&A was carried out and by the moment when it took place, as Cheng, Gup
and Wall (1989) remark. This fact means the results of works performed cannot be applied to any country
or institution.
On the one hand, the works performed focus on the analysis of the transactions carried out within
the American market, whereas no studies of this kind have been carried out for the European market.
Europe shows less regulatory restrictions for banks expansion, both geographically and of products, than
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the United States4. Such lenient restrictions imply more potential buyers target financial institutions and
thus premiums paid for banking M&A in Europe could be higher.
On the other hand, previous works have resulted in mixed conclusions and depend largely on the
moment when they were performed, the sample analysed and the methodology involved. In fact, many of
these works have focused on quite limited samples, not performing an analysis on the wave of mergers
and acquisitions that took place during the 1990s, since data used for most studies date from the 1980s.
Second, this study will allow us to eliminate some of the limitations found in previous works to
analyse the reasons for M&A deals since it offers an alternative perspective for analysis.
M&A deals involving credit institutions can be due to different reasons that usually vary
according to the characteristics of each institution, country or even period of time. Generally, two
essential reasons can justify a M&A: maximization of the institution value and maximization of
managers’ wealth or the search for private profits.
Determination of such reasons constitutes an empirical fact which has been considered in the
literature from two perspectives.
On the one hand, abnormal return associated to M&A transactions has been studied in order to
quantify the effects the consolidation has on value creation expectations of the market. In this sense, when
a positive abnormal return takes place the reason for the transaction could be value maximization, and
when it does not the reason for the transaction could be the search for private profits5.
The disadvantage of these studies is the fact that their results can show investors’ opinion and
speculative behaviour towards the operation results expected. However, operation results do not clearly
determine the reasons for the transaction, since the results expected by investors can vary from managers’
objectives.
On the other hand, the effects of the transaction on profitability and efficiency of the institutions
involved have been studied in order to analyse the reasons for M&A. However, this kind of works also
show some limitations. On the one hand, the use of accounting information in order to determine the
4
In the United States, the Glass Stegall Act, which was in force until November 12th 1999, imposed
restrictions on the acquisition of non-banking financial institutions by credit institutions, thus restricting
product diversification. Until the Riegle-Neal Act was approved in 1994 and was put into force in 1997,
restrictions on inter-state acquisitions existed to limit geographical diversification.
5
Results from these works generally show that shareholders of the target institution are positively
affected and those of the acquiring institution are negatively affected, while results concerning the whole
effect have not proved conclusive (Houston and Ryngaert, 1994; Madura and Wiant, 1994; Becher,
2000).
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variables involved, and on the other hand, evaluation of profitability or efficiency immediately after the
transaction takes place does not show managers’ expectations, so the reason for the transaction could be
misinterpreted6.
In this sense, an analysis of the determinants of the premium paid for the transaction avoids some
of these disadvantages, since it helps to determine what variables of the target institution could be
attractive as well as the reasons for the acquisition. The advantage of this analysis on the events studies is
that the premium is not directly associated to investors’ opinion or speculative behaviour. On the other
hand, the analysis of premium determinants considers the reasons to carry out the M&A a priori, what
means when the transaction is paid. In this case, the reason for the transaction would not be affected
although neither managers’ expectations nor expected profitability or efficiency are achieved (Rhoades,
1987).
This work is structured as follows. Section 2 constitutes a revision of previous studies of the
premium paid for banking M&A and raises the different hypotheses to test. Section 3 describes the
sample, methodology and variables used. Section 4 shows the main results obtained from the empirical
analysis and section 5 shows the main conclusions.
2. DETERMINANTS OF PREMIUMS PAID FOR BANKING MERGERS AND ACQUISITIONS:
A LITERATURE REVIEW
Two different methodologies have been used in previous studies analysing premium
determinants. On the one hand, some works introduce a number of financial ratios and other variables
directly in the samples they analyse in order to subsequently select those becoming more significant in a
stepwise analysis (Fraser and Kolari, 1988; Frieder and Petty, 1991). However, this methodology is
highly arbitrary and models usually over-adjust. On the other hand, another group of works select the
variables included in the model according to a number of hypothesis based on previous empirical analysis
and the existing literature (Hannan and Rhoades, 1987; Worthington, 2004). Such methodology
represents a more consistent way to choose the factors to be analysed and thus avoids the disadvantages
of the previous method. This work will be performed according to the second method.
The premium paid is analysed according to different factors belonging to two main categories:
the characteristics of the target company that are attractive and justify the payment of a higher premium
6
It can take a long time to perceive the effects of M&A on profitability. According to Rhoades (1994)
50% of income from banking acquisitions comes after the first year following the operation. That is why
a longer period of time is analysed in most studies, considering results from the first year to even the sixth
year after the operation takes place.
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and the characteristics of the acquiring company that determine its capacity to carry out the acquisition,
which are developed below and set the basis for the hypotheses to be considered.
2.1. Characteristics of the target company that justify payment of a premium.
Two factors associated with the expected operation results can make the target institution
attractive. On the one hand, payment of a premium for the acquisition suggests the acquired institution
value is higher for the acquirer than for its original owners. Such higher value can be explained by the
possibility that the acquirer enhances the profitability of the target institution, for instance, through scale
economies or by improving management of the company. On the contrary, the objective of the acquiring
institution can be different from value maximization. In this case, managers would try to increase the size
of the institution in order to obtain higher private benefits.
2.1.1. Value maximization
Value maximization should be the main reason for the consolidation operations (Berger,
Demsetz and Strahan, 1999; Group of Ten, 2001). Different factors can contribute to value maximization:
scale economies, scope economies, market power, management improvement and risk reduction through
the geographical and product diversification arising from M&A transaction.
a) Scale and scope economies
First, the reason for banking mergers can be the search for synergies through scale or scope
economies. Presence of scale economies would imply the reduction of costs or the rise of profits per unit
due to an increase in size or in the number of transactions. Scope economies allow reductions of costs per
unit due to synergies arising from the commercialization of different products by the same institution.
In this sense, the price paid for a M&A can depend on the capacity of the acquirer to reduce the
costs of the new organization. Such reduction is easier when acquiring small institutions (Thompson,
1997; Focarelli, Panetta and Salleo, 2002; Worthington, 2004). In particular, previous works frequently
use a variable considering the “relative size between the target and the acquiring institutions” to look at
this point. The more their size differs, the more the acquirer can improve efficiency and profitability of
the target institution through scale and scope economies and through new services and technologies.
Moreover, when the size of the target institution is similar to that of the acquirer it is more difficult and
expensive to merge their different cultures.
Empirical evidence in this sense has proved inconclusive. Relative size has been calculated by
considering both the size ratio of the acquirer to the target institution and its inverse. On the one hand,
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Darnell (1973) found a positive relationship between this variable (which implies the existence of major
differences between the size of the two institutions involved) and the premium paid by using the first
variable. This variable is not significant in Jackson and Gart’s work (1999), since they find synergy is
possible only if both institutions are located in the same geographical area apart from having a similar
size. On the other hand, a negative relationship with the premium paid has been found by Benston,
Hunter and Wall (1995), Palia (1993) and Cheng, Gup and Wall (1989)7 according to the second variable.
This means the bigger the difference in size of the institutions involved is the higher the premium paid is.
Brewer, Jackson, Jagtiani and Nguyen’ work (2000) is performed in the same terms, although they
consider how the market values their difference in size. The negative relationship found between the
relative size and the abnormal return arising from announcement of a M&A deal has led them to conclude
that the market does not consider the benefits coming from the creation of a “too big to fail” institution,
but it concentrates on the problems arising from the union of the cultures of two big institutions.
b) Market power
Another reason for M&A deals is the search for an increase in market power. In this sense, the
most attractive institutions would be those located in the same geographical area as the acquirer since
they would help the acquirer to increase its power within a particular market. This fact can imply an
increase in benefits through a rise of interest rates for loans and a decrease in interest rates for deposits
(Berger, Demsetz and Strahan, 1999). As a result, if the transaction aims at increasing market power, the
higher market share of the target institutions is, the higher the premium will be, in case both institutions
are located in the same country. However, the restrictions authorities can impose on the acquisitions
leading to a significant increase in market power, which aim at protecting competitiveness, should be
taken into consideration.
c) Management improvement
Management of the target institution can also have an effect on its price. On the one hand,
premium would be higher if management of an institution is considered to be inefficient but it can be
improved through re-organization and/or by changing business behaviour of the company. However, on
the other hand, the acquirer can be more interested in those institutions which have been correctly
managed, so the premium paid for well-managed institutions can be higher. Generally, evidence found
shows the second case is more probable, as explained below.
7
Such relationship is found to be positive in Rogowski and Simonson’s work (1987).
7
On the one hand, the less efficient the target institution is before the acquisition, the easier it will
be to improve management and to enhance its efficiency and value, and thus the premium paid could be
higher8. As long as the industrial sector is concerned, Bethel, Porter and Opler (1998) point out that low
performance of target institutions can be detected and solved through acquisitions9. However,
management problems are not so easy to detect through acquisitions. In fact, only a third of the hostile
takeovers that took place, for instance, in the United Kingdom in 1989 and in early 1990 aimed at
institutions showing clear signs of bad management. Despite the fact that more than half the bank
managers are fired within the two years following the transaction, both Martin and McConnell’ work
(1991) for the United States and Franks and Mayer’s work (1996) for the United Kingdom show there are
no significant differences in the premium paid for those target institutions where the executive had
changed and those where it had not.
On the other hand, higher premiums should be paid for well-managed institutions, since they are
considered to be more valuable. Previous studies have considered such management efficiency through
profitability.
Evidence found shows a positive relationship between premiums and profitability, both Return
on Assets - ROA (Fraser and Kolari, 1988; Hakes, Brown and Rappaport, 1997; Palia, 1993; Jackson and
Gart, 1999) and Return on Equity - ROE (Beatty Santomero and Smirlock, 1987; Cheng, Gup and Wall,
1989; Frieder and Petty,1991; Shawky, Kilb and Staas, 1996 and Brewer, Jackson and Jagtiani, 2000).
d) Diversification
One of the reasons for a banking merger is the wish to reduce total risk through geographical and
product diversification. The acquiring institution aims at diversifying profits through higher cash flow for
the same risk level. As a result, the acquirer could pay more when the target institution allows a
diversification of profits (Benston, Hunter and Wall, 1995). In this sense, a negative relationship between
risk (measured by the standard deviation of the performance of the target institution) and the premium
paid has been found. This fact supports the hypothesis that suggests the transaction aims at diversifying
profits (Benston, Hunter and Wall, 1995; Brewer, Jackson and Jagtiani, 2000).
8
Some works use corporate governance variables to evaluate management quality of the target institution.
They consider the effects that both the size and composition of the board of directors (Brewer, Jackson
and Jagtiani, 2000) and the shareholding structure of the institution (Palia, 1993) have on management
quality. These works also analyse the effects of such factors on the determination of the price paid for
acquisitions.
9
Purchase of a block of shares corresponding to at least 5% of total shares of the institution.
8
Likewise, higher premiums could be expected to be paid for acquisition of non-banking financial
institutions (such as investment and insurance companies) by credit institutions when the transaction aims
at diversifying their activities. Conclusive results cannot be found from an empiric perspective to state
that acquirers can improve their results through the acquisition of non-banking financial institutions10
(Cyree, Wansley and Black, 2000), so diversification of profits could explain payment of higher
premiums for transactions of this kind (Kwan, 1998). However, European banks act according to the
principle of “Universal Banking” providing a wide range of products. Except for some exceptional cases,
most European credit institutions provide services related to insurance, investment and pension plans
apart from the traditional banking commercial services. That is why, in this context, payment of higher
premiums for non-banking financial institutions would be nonsense11. However, despite the fact that all of
them provide financial services, credit institutions can be divided into different specialized groups
according to the services they concentrate on (DeLong 2001). In this sense, acquirers could be interested
in institutions belonging to a specialized group providing different products and could be willing to pay
higher premiums for them.
The search for geographical diversification can also have an effect on the price paid for M&A
transactions, since the risk-profitability relationship of the institution can be improved because of the low
correlation existing between costs and income coming from different locations. In this sense,
geographical diversification would be positively related to the premium paid.
However, geographical diversification can reduce the efficiency of institutions involved in crossborder transactions and, as a consequence, the premium that the acquiring company is willing to pay.
There are two reasons for that: first, difficulties for managing and controlling institutions from a distance
(Berger and DeYoung, Genay and Udell, 2000); second, the existence of a number of obstacles to the
establishment of foreign companies into domestic economies, such as language, culture or regulatory
barriers. In this sense, cross-border mergers and acquisitions are less frequent than domestic ones.
Domestic consolidation operations not only eliminate these disadvantages, but also offer the possibility to
10
In fact, most diversified institutions seem to quote at a discount compared to non-diversified
institutions. Some of the reasons for this discount are, among others: an inefficient allowance of capital
expenses to the different divisions of the company, difficulties to establish payment mechanisms
motivating managers of diversified institutions, information asymmetries between the chief executive and
division directors (Campa and Kedia, 2002).
11
In fact, acquisition of non-banking financial institutions is not found to produce profits for the acquiring
institution in Díaz et al. (2004).
9
eliminate redundant costs arising from geographical overlapping (Berger and Humphrey, 1992; Pilloff,
1996).
As a consequence, evidence regarding the premium paid for transactions contributing to
geographical diversification has showed mixed results. Works performed in the United States market
have considered this point by differentiating the transactions that take place within the same state and
those performed at an inter-state level. On the one hand, geographical diversification through M&A deals
leading to markets expansion is considered to imply payment of a higher premium. In this sense,
premiums paid for inter-state transactions are considered to be higher (Rogowski and Simonson, 1987,
Frieder and Petty, 1991, Shawky, Kilb and Staas, 1996). On the other hand, M&A deals carried out
within the same state are considered to allow reduction of costs and obtaining of synergies arising from
scale economies. In this sense, Jackson and Gart (1999) found payment of higher premiums for within the
same state transactions.
e) The market where M&A takes place as the reason for the premium paid
The market where the target institution operates can be attractive for the acquirer, since it can
determine the profitability of the transaction and thus lead to value maximization. As a result, the price
paid for the acquisition would be affected by the market.
On the one hand, higher economic growth or development of banking in the country where the
target institution is located implies the capacity to generate new income by the acquirer. As a
consequence, higher premiums would be paid for those institutions located in countries where growth
rate12 is higher or banking is a more important sector13 (Rhoades, 1987; Frieder and Petty, 1991; Focarelli
and Pozzolo, 2001).
On the other hand, payment of a premium to enter more concentrated markets has been
considered by some authors, since those markets are more likely to be profitable due to lower
competitiveness. However, evidence found shows mixed results. Although Beatty, Santomero and
Smirlock (1987) found a positive and significant relationship between the premium paid and this variable,
other authors found no significant relationship (Hakes et al., 1997; Brewer, et al., 2000b).
The importance of the market where the target institution operates has led a number of authors to
introduce on their analysis of premium determinants dummy variables indicating the geographical area
12
This variable has been evaluated through expected growth of deposits or population growth.
This variable has been evaluated through the ratio credits in a country to Gross Domestic Product
(GDP).
13
10
where it is located (Frieder and Petty, 1991; and Brewer, et al., 2000b). In this sense, any possible factor
affecting payment of a higher premium within a particular market could be controlled.
2.1.2. Objectives differing from value maximization
Different factors can also explain the reasons why the target institution seems attractive for the
acquirer and thus justify the merger and acquisition deal. These factors do not aim at maximizing
institution value, but directors’ wealth or private profits (Berger, Demsetz and Strahan, 1999; Group of
Ten, 2001).
Mergers can be done with the aim of increasing the institution size. Such objective, called “too
big to fail”14 in Anglo-Saxon literature, has been one of the reasons for major banking mergers in the
1990s (Kane, 2000) and can justify payment of higher premium for mergers between similar institutions
and for mega-mergers. The wish to aggressively grow means bigger and more profitable institutions are
more willing to pay higher premiums for M&A transactions (Hakes, Brown and Rappaport, 1997).
Likewise, higher growth of the target institution would contribute to meet such objective. In this
sense, asset growth has been generally used as the variable to evaluate this growth. Evidence found
concerning this variable shows mixed results. It was found to be significant by Hakes, Brown and
Rappaport (1997), Cheng, Gup and Wall (1989)15, Rhoades (1987), but non-significant by Palia (1993).
On the other hand, the only reason for an acquisition could be the wish not to be absorbed by
other institutions –defensive attitude–. In this sense, Louis’ study (2004) shows those institutions which
have been the target in a previous transaction pay higher premiums for acquisitions.
Likewise, if the M&A aims at controlling the target institution, the premium paid would be
affected by the shares percentage of the target institution that the acquirer owns before the M&A takes
place (Bris, 2002).
Finally, the possibility that managers adopt “herd” behaviour and carry out consolidation
operations simply to emulate and follow their competitors must be considered. Banking consolidation
process could also be explained as a response to deregulation (Berger, De Young, Genay and Udell,
2000), in the same way that Mitchell and Mulherim (1996) justify business acquisitions as a reaction to
industrial shocks, deregulation and financial innovations with the aim of reorganizing the company to
14
The reason for non-failure of such institutions may be they are more protected by banking authorities.
These authors have also considered other growth variables as explanatory variables for the premium
paid, such as: growth of profitable assets, including loans, deposits in other banks, public debt,
investments in assets and discounts; growth of main deposits, including all kinds of deposits except for
inter-banking ones; and equity growth.
15
11
adapt to a new reality.
2.1.3. Other variables of the target institution that justify the premium paid for M&A
deals.
a)
Equity / assets. Banking regulation establishes that credit institutions must maintain a
minimum percentage of equity so that risk can be reduced. However, a larger proportion of
equity on assets could imply the target institution is not efficiently using its capital and is risk
averse. This which makes the institution less attractive and thus the premium paid is lower.
Evidence in this sense has been found by Rhoades, (1987), Rogowski and Simonson (1987)
and Hakes, Brown and Rappaport (1997). However, Palia (1993) has not found significant
results for this variable16.
b) Loans / total assets. This ratio is used to estimate both non-liquidity of assets and the effects of
possible losses arising from loans on assets and capital, which would make the target
institution become less attractive and thus would reduce the premium paid, ceteris paribus17
(Beatty, Santomero and Smirlock, 1987).
c)
Non-interest income / assets. An important change in banks’ income structure has taken place
in the 1990s. Increased banking competitiveness has reduced traditional income from interests.
This means that non-interest income has become the most dynamic source of income for
European banks. These sources of income are, for instance, benefits from loan securitisation,
credit card services and issues placing (Hakes, Brown and Rappaport, 1997). A positive
relationship between this variable and the premium paid has been found.
2.2. Capacity of the acquirer to pay and to improve management of the target institution: effects on
the premium
Two characteristics of the acquirer can affect the premium paid for a M&A: capacity to pay and
capacity to improve management of the target institution.
Financial strength of the bank allows payment of a higher price for M&A transactions. The
following variables of the acquirer have proved positively significant for premium determination: non16
Another variable has been considered for the determination of the premium paid: excess of equity,
measured by the difference between the ratio equity to assets and the proportion of equity that institutions
must maintain according to banking regulation (Frieder and Petty, 1991).
17
The percentage of loan cancellations on total loans has also been considered from an empirical
perspective for determination of the premium paid. However, results from these works prove
inconclusive. A negative relation has been found by Frieder and Petty (1991), a positive relation by
Cheng, Gup and Wall (1989) and no significant relation by Brewer et al. (2000b).
12
interest income, return on assets (Hakes, Brown and Rappaport, 1997) and proportion of equity on assets
(Benson, Hunter and Wall, 1995). However, other authors such as Jackson and Gart (1999) and Frieder
and Petty (1991) find a non-significant relationship between the premium paid and the following financial
variables of the acquirer: size, return on assets, proportion of main deposits on assets, leverage ratio and
return on equity. Such lack of significance has led some authors to exclude the characteristics of the
acquirer from their analysis (Palia, 1993).
However, despite the capacity of the acquirer to pay has sometimes proved not be significant for
determination of premiums, the means of payment (stock or cash) has proved especially relevant
according to two reasons: financial synergies and overvaluation hypothesis. According to the first one,
Hakes et al. (1997) consider transactions paid in stock can offer higher financial synergies than
transactions paid in cash, since the latter could imply liquidity restrictions. In this sense, the premium paid
is higher when the transaction is paid in stock (Hakes et al., 1997; Shawky, Kilb and Staas, 1996; Beatty,
Santomero and Smirlock, 1987). The same relationship between the premium and the form of payment
can be explained according to Myers and Majluf’s (1984) overvaluation hypothesis. Their hypothesis is
based on the existence of asymmetric information about the company, considering directors have more
information than the rest of agents. If directors of the acquiring institution consider their shares to be
overvaluated, they will be more willing to pay the acquisition in stock. However, payment in stock would
be interpreted as a negative sign by the market, which is aware of information asymmetries, and thus the
value of shares of the acquirer would decrease. So the premium should be higher for those acquisitions
paid in stock than for those paid in cash.
On the other hand, if the acquirer is well-managed it will be more likely to improve management
of the target institution and higher value of the institutions involved will be possible. Since management
quality cannot be directly observed, some variables such as profitability and growth of the institution have
been considered to estimate it. In this sense, the following variables of the acquirer have proved
significant for determination of the premium paid: asset growth (in a negative sense, Cheng, Gup and
Wall, 1989), growth of main deposits (in a positive sense, Cheng, Gup and Wall, 1989) and return on
assets (in a positive sense, Hakes, Brown and Rappaport, 1997).
In short, a revision of the existing literature would allow us to establish the following hypotheses
for the analysis of premium determinants, and this in turn would allow us to reach some conclusion
regarding the reasons for M&A deals.
13
H1: “The more attractive the target institution is for an acquirer aiming at maximising institution
value, the higher the premium paid will be.”
H2: “The more attractive the target institution is for an acquirer aiming at obtaining private
benefits, the higher the premium paid will be.”
H3: “The better financial strength and management of the acquirer, the higher the premium
paid.”
3. EMPIRICAL ANALYSIS: SAMPLE DEFINITION, VARIABLES AND METHODOLOGY
3.1. Definition of the sample
The empirical analysis is carried out for a sample of mergers and acquisitions accomplished by
European Union banks during the period 1994-2000. The measurement of some of the variables used in
the study will need two years lagged data, therefore the information about banks will range the period
1992 – 2000.
We started with a sample of 4187 European banks that supply data to the Bankscope database
and a sample of 1465 acquisitions by European banks provided by Thomson Financial. Then, we refined
the sample in the following way. We eliminated from the sample those operations for which we did not
have information about the premium paid (this information was only available in 193 operations).
According to the available information in Bankscope database about banks, we also have to eliminate
from the sample outside the European Union M&A and operations in which the target was a nonbank
financial institution (such as insurance companies, investment agencies and mortgage bankers). Finally,
the analysis was conducted on a sample of 81 M&A. The number of different banks that took part in these
operations is 14718.
Table 1 shows the number of M&A in the sample per year and table 2 shows the number of
M&A per bidders´ and targets´ country. The number of operations is concentrated in the last years of the
analysed period and in the following countries: Italy, Spain and France. Moreover, table 3 shows some
characteristics of the analysed M&A. Most of the operations are paid in cash (80%) and are domestic
(81%). The number of operations accomplished by banks compared to the ones done by savings banks or
cooperatives is quite similar (57% by banks and 43% by savings banks and cooperatives). However, in
81% of the M&A the target is a bank.
18
In the sample, the same bank can take part in different acquisitions during the analysed period of time.
Therefore, the same bank can be bidder or target in different operations, or be the bidder in a M&A and
the target of another M&A.
14
[Insert Table 1, 2 and 3]
Apart from the aforementioned databases, we also used World Development Indicators 2001 for
macroeconomic information.
3.2. Methodology
The methodology used to test hypotheses 1, 2 and 3 is based on a linear regression analysis
(Rhoades, 1987; Cheng, Gup and Wall, 1989; Hakes, Brown and Rappaport, 1997). This analysis allows
us to show the determinants of the premium paid and will help to establish some conclusions about the
reasons to carry out a M&A as well as the characteristics of the acquiring bank that explain the payment
of a higher or lower premium19.
In particular, the equation to test is the following:
Premium it = µ 0 + β0 T_EQUITY + β1 T_LOAN + β2 T_NII + β3 A_EQUITY + β4 A_NII +
+ β5 A_GASSET + β6 CASH + β7 T_GASSET + β8 PREV_OWN + β9 PREV_ACQ + β10 T_ROE +
+ β11 A_ROE + β12 NATIONAL + β13 POWER + β14 DIVERSIFICATION + β15 A_SIZE + β16 T_SIZE
+ β17 RSIZE +
j =7
∑
γ j Country Dummysj +
j =1
t = 2000
∑
µ t Time Dummyst + uit
t =1995
3.2. Variables description
a) Dependent variable: the premium
Dependent variable is purchase price to book value of the target, as it is in most of the studies20.
This variable has limitations since bank’s book value is not a perfect substitute for the market value of its
net assets. However, market values simply are not available. Nevertheless, because the vast majority of a
bank’s assets and liabilities either are short term or are repriced frequently, the approximation is
acceptable (Frieder y Petty, 1991).
The mean premium observed in the sample of European M&A is 2.1814 with a maximum value
of 9.76 and a minimum value of 0.30, being the standard deviation 1.44. In other studies carried out for
the United States market the mean premium has been lower. Palia (1993) shows a mean premium of 1.89
(with a minimum value of 0.7 and maximum of 4.9) and Jackson and Gart (1999) show a mean premium
of 1.987.
19
Cook and Weisberg (1983) test to detect heteroscedasticity, that test the null hypothesis of constant
variance and is distributed as a chi-squared, show the presence of this problem in the regressions
accomplished. Therefore, we used White correction to estimate the standard error, obtaining a consistent
value for it (Benston, Hunter and Wall, 1995).
20
Hakes et al. (1995), Jackson and Gart (1999) and Palia (1993).
15
In the next section the independent variables used to test the hypotheses are described. The
selection of these variables is derived from the literature revision carried out in section 2. The
independent variables that measure characteristics of the target or acquiring bank use financial
information of these institutions the year previous to the M&A.
b) Independent variables used to test hypothesis 1. These variables consider characteristics of the target
firm that justifies the payment of a premium when the M&A aim is to maximize value.
Variables related with the possibility of getting scale and scope economies.
•
Size of the target bank (T_SIZE): measured by the natural logarithm of total assets of the target
bank.
•
Relative size (RSIZE): target bank’s total assets over acquirer’s total assets, expecting a negative
relationship with the premium paid.
Variables related with the search of an increase in acquirer’s market power.
•
The variable POWER will take into account the target bank’s market share and its presence in
the same market as the acquirer. This variable multiplies the variable SHARE and the variable
NATIONAL.
Deposits
Market SHARE:
it
, measured by the proportion of the total deposits of
n
∑ Deposits
i =1
it
a country that corresponds to a bank, i being each of the banks in a country.
NATIONAL: dummy variable that takes value 1 if the M&A is domestic and 0 if it is crossborder.
Variables that consider the management quality of the target bank.
•
Target bank profitability (T_ROE):
Net profitt −1
Equityt −1 + Equityt − 2
2
Variables related with diversification search
•
Product diversification (DIVERSIFICATION)
The variable used to measure product diversification requires of a detailed explanation, since for
its calculation it was necessary to carry out a cluster analysis that allows identifying groups of banks
according to their product specialization.
The cluster analysis makes groups of banks minimizing the differences among companies inside
each specialization group, at the same time that the differences are maximized among the different groups
(Pérez et al., 2003).
16
The cluster analysis is carried out over a sample of European credit institutions21 provided by
Bankscope database during the period 1993 - 1999 and with total assets over 60 million of euros, to
assure a minimum size of the companies included in the analysis. With this selection approach, the
number of observations is 20,347 and the number of banks is 3,861.
To determine the specialization groups we use variables that consider the assets and liabilities of
the European credit institutions. These variables that are shown in table 4 allow identifying two
specialization groups in the European banking system.
[Insert table 4]
The first group is specialised in the traditional banking activity (loans and deposits), while group
two includes more diversified banks and with a high importance of the inter-bank activities.
67 acquisitions, out of the 81 acquisitions analyzed in this work, were carried out between banks
belonging to the same cluster or specialization group, while 14 took place among banks belonging to
different groups, or with the aim of product diversification. Finally, the variable DIVERSIFICATION is a
dummy variable that takes value 1 when the acquirer and the target bank belong to the same group and 0
otherwise.
•
Geographic diversification (NATIONAL). The variable NATIONAL, previously described,
differentiates between domestic acquisitions and cross-border ones.
Variables that consider characteristics of the target bank market.
The characteristics of the country the target bank belongs to will be considered through two
types of analysis. Firstly, we will introduce dummy variables to identify the target firm country, trying to
control for any possible reason that can provoke the payment of a higher premium in a concrete market.
However, some authors consider more appropriate to use specific variables to measure the possibility to
obtain earnings derived from the acquisition in a certain market, as we pointed out in the theoretical
revision. Therefore, secondly, two variables are introduced:
•
The size of the banking sector in a country (CRED_GDP): measured by the ratio of bank
domestic credit to Gross Domestic Product.
•
21
22
Concentration of the deposits in each country22 (HERF): measured through the Herfindahl index.
We considered the ten European countries shown in table 2.
See Corvoisier and Gropp (2001).
17


Depositsit
HERFit = ∑  n

i =1
 ∑ Depositsit
 i =1
n
2

 , i being each of the banks in a country. We have one concentration




index for each country and year of the sample.
c) Independent variables used to test hypothesis 2. These variables consider target bank characteristics
that justify the payment of a higher premium when the aim of the acquisition is not value maximization.
Variables related with the aim of achieving a great size.
•
Relative size (RSIZE): target bank’s total assets over acquirer’s total assets, expecting a positive
relationship with the premium paid.
•
Size of the acquirer (A_SIZE): measured by the natural logarithm of total assets of the acquirer.
•
Target bank’s growth in assets (T_GASSET) = (Assetst-1 – Assetst-2 ) / Assetst-2
Variables that consider if the acquisition is accomplish to avoid being acquired (as a defensive measure).
•
PREV_ACQ: dummy variable that takes value 1 if the acquirer has been previously the target of
an acquisition and 0 otherwise.
Variables that consider if the aim of the M&A is to achieve the control of the target bank.
•
PREV_OWN: ownership percentage of the target bank owned by the acquirer bank before the
acquisition.
d) Independent variables used to test hypothesis 3. These variables consider if the acquirer is financially
strong and is able to bring a more efficient, value creating management team to bear on the target bank
and can afford to overpay.
Variables to measure if the acquirer is financially strong.
•
Acquirer’s non-interest income (A_NII) = Non interest income t-1 / Assetst-1
•
Acquirer’s ROE (A_ROE) =
•
Acquirer’s Equity (A_EQUITY) = Equityt-1 / Assetst-1
•
Means of payment (CASH): Dummy variable which will take value 1 if the payment is in cash
Net profitt −1
Equityt −1 + Equityt − 2
2
and 0 otherwise.
Variables that consider the ability to improve management.
•
Acquirer’s growth in assets (A_GASSET) = (Assetst-1 – Assetst-2 ) / Assetst-2
18
e) Control variables (characteristics of the target bank).
•
Equity (T_EQUITY) = Equityt-1 / Assetst-1
•
Loans (T_LOAN) = Loans t-1 / Assets t-1
•
Non-interest income (T_NII) = Non-interest income t-1 / Assetst-1
Lastly, time dummy variables indicate the year of the acquisition23. These variables consider the
influence of any macroeconomic event or other variables over the M&A activity and therefore over the
premium paid (Brewer, Jackson and Jagtiani, 2000). Moreover, nowadays the number of mergers and
acquisitions is becoming higher and there are fewer banks to be acquired. Therefore, as time passes the
premium paid should be higher24 (Darnell, 1973).
Table 5 shows the descriptive statistics of the variables (mean and standard deviation).
[Insert table 5]
4. RESULTS OBTAINED IN THE EMPIRICAL ANALYSIS
The following section shows the main results obtained from our empirical analysis.
4.1. General Analysis
Table 6 shows the results obtained from the empirical analysis for the whole sample of M&A.
The first three columns show the results attained from regression analysis when considering dummy
variables for the country to which the target institution belongs. The next three include specific variables
for the country that may make the acquisition more attractive and therefore increase the premium paid.
The results described below, prove to be almost identical in both cases.
Firstly, all the regressions in table 6 show a series of variables for the target institution that are
significant for explaining the premium. These variables are: T_EQUITY, T_LOAN and T_ROE.
The first two variables were included in the analysis as control variables, given the prior
empirical evidence pointing to their influence on the premium. The results corroborate those obtained in
these previous studies. On the one hand, a higher percentage of equity over assets makes the target
institution less attractive, as it is considered to use its resources inefficiently and it is risk adverse,
therefore the premium paid is lower (Hakes et al. 1997). Furthermore, the T_LOAN variable, indicative
of the target institution’s percentage of loans over total assets, also reduces the premium paid, indicating
that those institutions with greater non-liquidity assets also prove less attractive (Beatty et al. 1987).
23
When all the time dummy variables take value 0, it means that the acquisition has been accomplished in
1994.
24
Table 1 shows that the mean value of the premium is higher in the last years of the sample than in the
first ones.
19
The profitability shown by the target institution for the year prior to the takeover is both
significant and positive in explaining the premium. The profitability variable shown in the results is return
on equity25. This result is in line with the findings from previous works inasmuch as M&A operations do
not show higher premiums in the takeovers of companies which have been less well managed and have
had lower profit levels, therefore it cannot be stated that the aim underpinning the operation is better
management of the target institutions. Rather, the results show that higher premiums are paid in the
takeovers of those institutions that are more attractive because their yields are higher (Brewer et al.
2000b)26.
The premium paid in takeover operations does not depend on the NATIONAL dummy variable,
which differentiates domestic operations from those carried out between different EU countries. This
result highlights the debate that exists over the advantages and disadvantages of carrying out international
operations. If, on the one hand, the search for greater geographical diversification led to the payment of
higher premiums for cross-border operations, the problems arising from cultural, linguistic and regulatory
barriers would lead to a preference for domestic operations.
In particular, mergers and acquisitions carried out by credit institutions in Europe, still tend to be
at a domestic level. In fact, 66 of the operations analysed in this research work have been internal and
only 15 have crossed national borders.
Therefore, despite the fact that in the EU internal operations are exhausting their capacity to
generate economies of scale and cost reductions, and the search for new opportunities is advised through
the consolidation between institutions from the different member states, the directors of many institutions
still expect greater earnings from domestic operations, and thus do not decide to make cross-border
takeovers27. Furthermore, in many cases it is often the obstacles raised by national authorities, which by
25
However, we also carried out the analysis using return on assets (ROA). This variable does not alter the
principal results obtained for the variables determining the premium paid, although the ROA was not
significant either for the target institution or for the acquirer.
26
Furthermore, analysis was undertaken whereby the ROE variable was replaced by a cost efficiency (or
operating efficiency) accountancy indicator, defined as the percentage of ordinary profit margin that
absorbs running costs. This variable provides a measure of the capacity to generate income in relation to
costs borne and indicates greater efficiency when the ratio decreases. The results obtained from the
regression analysis where the ROE variable is replaced by that of operating efficiency, corroborates all
the results obtained previously. Nevertheless, the variable that measures the efficiency of the target
institution is not significant. i.e. the results underline that higher premiums are paid for those more
profitable institutions but not for more efficient ones.
27
In fact, Beitel, Schiereck and Wahrenburg (2004) indicate that mergers between national banks produce
an average increase in shareholder value of 1.5% when the merger is announced, whilst that produced
between banks from different countries has a profitability of –0.4%.
20
trying to protect institutions in their own countries from foreign bids prevent profits being obtained in
international mergers and takeovers28.
Therefore, being faced with the exhaustion of advantages in their domestic operations and the
information barriers and government restrictions to which they are exposed in cross-border acquisitions,
acquirers do not behave any differently in the premiums they pay for either type of operation.
The POWER variable, resulting from jointly considering domestic operations and the target
institution’s market share, shows a significant and negative relationship in regressions 4, 5, and 6 in
which specific variables for the target institution’s country have been included. This result shows that the
acquirer is not willing to pay higher premiums to increase its market power by taking over institutions
with a greater deposit share. However, if we analyse the market share values of the target institutions in
detail, we find they are somewhat limited; falling below 1% in 47 takeovers and below 5% in a total of 65
operations. Therefore, it is not that the acquiring institution is not interested in increasing its market share,
but rather that with the market share of the target institutions this objective is not really achieved.
Furthermore, as was previously mentioned when the specialisation groups were analysed, 71 acquiring
institutions had already concentrated their banking activity in loans and deposits and would thus not be
willing to pay a higher price for institutions which implied the continued reinforcement of the said
activity29. Therefore, the fact that higher premiums are paid by those institutions within the same country
which enjoy a lower market share, must be due to other features of these institutions which are not
reflected through the said variable, such as reaching a specific geographic area within a country or
directing business toward a specific kind of client.
Product diversification, measured through the dichotomous variable, DIVERSIFICATION,
(which takes a value of 1 when the acquiring and target institutions belong to the same specialisation
group, and 0 otherwise) does not prove significant in explaining the premium. In fact, the income derived
from diversifying activities is not clear, which justifies more not being paid to diversify. In particular,
DeLong (2001) observes a positive abnormal yield of 3% only in those acquirers which concentrate on an
activity and on a geographic area, compared with those operations which give rise to financial
conglomerates and diversify their activity.
28
For example, in 1999 the Italian Government vetoed the operation between Banco Bilbao Vizcaya
Argentaria and Unicrédito, and also in 1999 the Portuguese Government raised many obstacles to
agreements between Banco Santander Central Hispano and the Champalimaud Group.
29
Likewise, there may be restrictions to increasing market power in defence of competition.
21
On the other hand, neither the size of the target institution (T_SIZE), nor its relative size
(RSIZE) are observed to be significant in explaining the premium. Therefore, higher premiums are not
found to be paid for smaller companies nor for those that are smaller in comparison to the size of the
acquiring institution and with which it would prove simpler to obtain economies of scale and scope.30.
This result also confirms that acquirers do not pay higher premiums for larger target institutions, in order
to attain greater size (Kane, 2000). The same conclusion is corroborated by the absence of significance
between the acquiring institution size (A_SIZE) and that of the growth of the target institution’s assets
(T_GASSET).
Therefore, with respect to H1, it can be concluded that different variables exist which make a
target institution attractive to an acquirer, such as its percentage of equity, its percentage of loans and its
ROE; larger premiums are thus paid for those institutions which are more valuable to the acquirer and for
those which are considered can attain a greater value maximisation. Nevertheless, it is observed how the
greater geographic or product diversification that can be attained through M&A has not been considered
by the acquiring institutions as a reason justifying the payment of higher premiums. The lack of
significance for some of the variables which should, in principle, have affected the premium paid, has
given rise to many mergers and acquisitions being justified through the need of the institutions to adjust
to their financial environments, in which increased deregulation and competition has led them to
undertake such operations (Berger, et al. 2000).
In addition, mergers and acquisitions may be used as a defensive measure, whereby those
institutions that have in the past been a takeover target, would be willing to pay higher premiums in the
takeovers they carried out, to thus reach a size that hinders their takeover by third party institutions. The
PREV_ACQ dummy variable takes value 1 if the acquiring institution has previously been taken over.
This variable proves insignificant in all of the regressions. It cannot therefore be stated that M&As have
been used as a defence mechanism by those institutions that have been takeover targets, as the findings do
not indicate payment of higher premiums. In fact, it has sometimes been observed that in institutions that
have recently been a takeover target, their management gains experience in this type of operations and in
their negotiation capacity, which may result in lower premiums being negotiated, and eventually paid..
30
However, as Jackson and Gart (1999) outline, there may be synergies which are only possible when
besides dealing with institutions of different sizes, both lie in the same geographical area. For this reason,
an interaction variable is introduced into regressions 3 and 6 between the relative size and the dummy
variable, NATIONAL, which indicates if both institutions belong to the same country. However, this
variable is also found not to be significant, although the significance of all the other variables observed in
regressions 1, 2, 4, and 5 is maintained.
22
Likewise, Hart and Apilado (2002) show how banks that do not have experience in the corporate control
market carried out worse takeovers.
The percentage of ownership that the acquiring institution had in the target institution prior to the
takeover (PREV_OWN) may affect the premium paid, given the acquiring institution’s interest in
attaining control. Therefore, if its level of ownership is low, a higher premium will be paid, in order to
guarantee the success of the bid and that the intended level of control is achieved. However, the greater
the percentage of ownership, the fewer shares the acquiring institution will need to purchase to attain
control and the target institution’s negotiation power is reduced; therefore the premium paid to achieve
the increased shareholding will be lower. The negative relationship observed between PREV_OWN and
the premium corroborates this approach31.
In general, the results observed for H2 do not enable us to conclude that M&A operations are
carried out with the aim of seeking private gains for the managers, given that M&As are not used as a
defensive mechanism, nor are higher premiums paid to attain a greater size.
Finally, there are also variables pertaining to the acquirer itself that may explain the premium
paid, despite the fact that in most of the works, these variables have not proved to be significant, as in this
study. Furthermore the percentage of the acquiring institution’s equity, an indication of its financial
strength, was not significant in the analyses undertaken. Likewise the asset growth in the acquiring
institution, the percentage of non-interest income (A_NII) and the A_ROE variable also proved not to be
significant.
Therefore, it may be said that neither the acquiring institution’s capacity to pay, nor the quality
shown in its management, lead to the payment of higher premiums as was set out in H3. However, the
means of payment used for the operation is found to be a determining variable in the premium, showing a
negative relationship between payment in cash and the premium. This supports not only the financial
synergies hypothesis (which sets out the payment of larger premiums when the operation is paid in stocks
instead of in cash, given the liquidity constraints that this latter form of payment may produce), but also
overvaluation hypothesis (given that payment in shares may be considered a negative signal, which will
lower the share value and the premium paid will be correspondingly higher.)
31
Furthermore, the non-linear relationship between the level of ownership and the premium was
considered, incorporating into the analysis the squared value of PREV_OWN, with the aim to test if there
is a positive relationship with the premium in cases of low levels of ownership, until control is attained
and then the relationship with the premium becomes negative. However, the non-linear relationship does
not prove significant and has therefore been omitted from the tables of results.
23
Lastly, the results obtained in the country dummy variables that had been included in regressions
1, 2 and 3 show the payment of lower premiums in France and higher premiums in Spain. As regards the
two variables used to measure the possibility of obtaining earnings in a specific market (regressions 4, 5
and 6), HERF and CRED_GDP; only the second one proves significant. In particular, the greater the
percentage of domestic loans over GDP (indicative of a larger and more developed banking sector in the
country), the lower is the premium that is paid. In Europe, the activity of granting loans is fairly
concentrated among the larger institutions, lowering the possibilities of getting earnings in this activity.
Thus, although a country has a high CRED_GDP value the premium paid will be low32.
[Insert Table 6]
4.2. Analysis by Institution Groups.
Table 7 shows the results obtained in the analysis of the operations carried out by banks and
those carried out by savings banks and cooperatives. In the sample, 47 operations were carried out by
banks and 34 by savings banks and cooperatives.
There are certain elements which differentiate savings banks from banks and which may lead to
differences in the aims pursued in a M&A. For example, savings banks do not seek, at least formally, to
maximise profits but to achieve a reasonable surplus and provide support to their member (part of the
profits obtained are dedicated to charity). Also, savings banks activity is focused on the traditional
banking activity and retail banking. These differences have led us to undertake the analysis of the
premium for the two groups of institutions. Cooperatives have been included in the analysis with savings
banks, bearing in mind the similarity in their business orientation, building societies.
The results show some differences in the determinants of the premiums paid between both
groups of institutions, although some of the aforementioned results are maintained,
On the one hand, table 7 shows how the means of payment in the operation is only significant in
premiums paid by banks, whereas it totally lacks significance for savings banks and cooperatives.
On the other hand, the aim pursued by savings banks and cooperatives in takeovers may be the
search for greater size, given that the payment of higher premiums is observed in operations between
institutions of a similar size, despite it is more difficult to obtain economies of scale, as was discussed in
the theory review. This same size objective is corroborated when we observe the payment of higher
premiums for larger-sized institutions (T_SIZE) and those showing more growth in assets (T_GASSET)
32
In fact, in Díaz et al. (2004), it is shown that the profitability attained by credit institutions is lower, the
greater the percentage of loans over GDP.
24
by those smaller-sized institutions (A_SIZE) and those showing less growth in assets (A_GASSET).
None of these variables is significant when analysing banks.
However, unlike what happens in banks, savings banks and cooperatives are found to pay higher
premiums for institutions with a higher percentage of equity (T_EQUITY), which highlights the interest
these institutions have for getting funding to pay other acquisitions and, to a certain degree, savings banks
and cooperatives’ greater risk aversion. However, the negative sign in the T_ROE variable observed for
savings banks effectively shows that more is paid for those institutions that are worse managed or have
been less profitable, since it is hoped that profitability will improve through the takeover.
Lastly, a significant negative influence is observed in the DIVERSIFICATION variable in
savings banks’ premium, which indicates the payment of higher premiums for those institutions
belonging to a different product specialisation group, i.e. they overpay to diversify. Savings banks and
cooperatives, whose activity is centred on deposits and loans, have therefore found in M&As a way to
diversify their activities. Also, higher premiums are paid for those institutions with higher non-interest
income or non-traditional banking activities.
Summarising, in the case of savings banks and cooperatives, the M&As undertaken pursue
specific objectives such as attaining greater size and growth, getting funding, improving the management
of the target institutions and the diversification of their activities.
[Insert Table 7]
5. CONCLUSIONS
The results obtained enable us to make a series of conclusions concerning the variables that
influence the price paid in M&A’s.
There are different variables that make a target institution attractive to an acquirer, such as its
equity percentage, its percentage of loans or its ROE. Nevertheless, it is observed how a greater
geographic or product diversification that can be attained through M & A has not been considered by the
acquiring institutions as a reason justifying the payment of higher premiums. It is only when we assess
the sub-sample comprising savings banks and cooperatives that evidence is obtained of a certain interest
in diversification of activities, and therefore the payment of higher premiums in takeovers which increase
diversification.
Therefore, to make the financial consolidation process develop successfully in the European
Union in the coming years, it would be convenient for the member states to reconcile their current
25
legislation on this matter. Currently Directive 89/646/EEC33 awards the authorities of each country the
power to limit, and even prevent, any operation they consider pertinent, under the criteria that adequate
management of credit institutions is required and also in function of the distortions in market competition
that they may produce. In fact, this legislation awards the government of each country the effective right
to veto, which has been used on numerous occasions, in order to protect national institutions and to avoid
their control by foreign institutions. This has hindered M&A’s of an international scale and has led to
acquirers undertaking cross-border operations less often than domestic ones. However, faced with the
thrust that international mergers and takeovers may experience in the coming years, fostered by the
definitive adoption of the new accounting standards (IAS), the recently approved new agreement on
capital (Basel II), and the entry of 10 new countries into the European Union, it is essential that
transparent, standardised procedures be set out34 that guarantee the success of such operations and allow
acquirers to recognise the advantages of cross-border operations, in view of the exhaustion of earnings
which is expected from domestic operations.
Furthermore, there was no evidence to suggest that M&As are being pursued with the aim of
achieving private profits for managers when analysing the whole sample of acquisitions (81). However,
when the savings banks sub-sample was assessed, it was observed that their aim in M&As has been to
attain a large size, and higher premiums were noted for mergers between equals, for larger institutions
and by those which have grown less, giving rise to large-sized institutions which are more difficult to
target for takeovers. This makes evident that the managers involved sought certain private benefits.
Therefore, in line with the Winter Report at European Union level or the Olivencia Report in
Spain, the regulators efforts to set out standards which increase transparency, reinforce managers’ and
directors’ responsibility, and in essence improve stakeholder protection should be intensified. Therefore,
agency problems will be reduced in M&A, in particular avoiding the search for private benefits by
managers and ensuring that although the objective of greater size and growth continue to be pursued in
the acquisition, the institutions guarantee value maximization.
33
This may also be found in Directive 2000/12/CE, which has gathered the legislation referring to the
activity and control of EU credit institutions into a single text.
34
Europe needs a common legal framework for takeovers. The Directive 2004/25/CE tries to achieve this
goal. However, the directive has been widely criticised because there is still too much freedom in this
matter for member states who can adopt their national laws to avoid a takeover accomplished by a foreign
institution. There is also a proposal for a Directive on cross-border mergers with the aim to make these
transactions easier reducing its costs.
26
Furthermore, the lack of significance for some of the variables which should, in principle, have
affected the premium paid has given rise to many mergers and takeovers being justified through the
institutions’ need to adjust to their financial environments, in which increased deregulation and
competition has led them to undertake such operations.
The results obtained from this study establish the need to continue the research of the premiums
paid in M&As. In particular, once the determinants of the premium have been analysed and the apparent
reasons underlying the takeover have been established, it would be interesting to study the influence that
the premium has over the success or failure of the operation, attempting to show whether the price paid is
appropriate, or to the contrary, the takeover is overpaid. This analysis can be accomplished by
considering the relationship between the premium paid and the long-term profitability of the institutions
involved in the acquisition.
6. BIBLIOGRAPHY
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31
Table 1: Number of mergers and acquisitions in each year and mean value and standard deviation
of the premium paid.
Year
N. M&A
1994
1995
1996
1997
1998
1999
2000
Total
1
11
9
11
14
17
18
81
Mean
Premium
1.9552
1.9277
1.9302
1.7265
2.4384
2.3126
2.4289
2.1814
Standard
deviation
.
.57140
.89922
.67876
1.61339
2.29009
1.32103
1.44777
Table 2: Number of M&A and mean premium by country.
Target bank
N. M&A
AUSTRIA
BELGIUM
DENMARK
FRANCE
GERMANY
ITALY
LUXEMBOURG
PORTUGAL
SPAIN
SWEDEN
Total
%
3
2
13
6
31
8
17
1
81
3.7
2.5
16.0
7.4
38.3
9.9
21.0
1.2
100.0
Acquiring bank
Mean
Premium
(Standard
deviation)
1.56 (0.92)
1.64 (0.12)
2.14 (2.36)
1.63 (0.54)
2.17 (1.0)
2.54 (1.65)
2.39 (1.61)
2.68 (.)
N. M&A
1
1
1
12
8
31
4
8
15
81
%
1.2
1.2
1.2
14.8
9.9
38.3
4.9
9.9
18.5
100.0
Mean
Premium
(Standard
deviation)
2.32 (.)
0.87 (.)
2.68 (.)
2.35 (2.43)
1.58 (0.60)
2.34 (1.27)
1.43 (0.17)
2.14 (0.60)
2.29 (1.70)
-
Table3: Characteristics of the M&A in the sample
Means of Payment
N. operations
Mean Premium
Stocks
Cash
16
2.85
65
2.01
Type of operation
Cross-Border
Domestic
(inside the
EU)
66
15
2.13
2.37
Type of operation
Merger
Acquisition
14
1.69
67
2.28
Type of institution
Acquirer
47
Savings Banks and
Cooperatives
34
2.13
2.24
Banks
N. operations
Mean
Premium
Banks
66
2.09
32
Target
Savings Banks and
Cooperatives
15
2.55
Table 4. Specialization groups in the European banking system.
Mean values for all the Mean values for the acquiring and
institutions over which target banks analyzed in this study
the cluster analysis is that belong to each group
done
Assets (Percentage)
Loans
Investments and Inter - bank
Fixed assets
Other assets
Liabilities & Equity (Percentage)
Deposits (demand, savings and
time deposits)
Inter-bank
Equity (Shares + Reserves + Net
profit - Dividends)
Other funding (Long-term
borrowing, Subordinated debt,
Hybrid capital)
Other liabilities
Number of credit insititutions35
Number of observations
Number of acquirers
Number of target institutions
ROA
ROE
Cluster 1
55.90
39.32
1.63
3.15
Cluster 1
62.41
Cluster 2
24.10
64.81
1.57
9.52
Cluster 2
16.67
Cluster 1
49.55
43.63
1.63
5.19
Cluster 1
44.84
Cluster 2
27.65
60.49
1.27
10.59
Cluster 2
22.39
19.65
5.89
36.45
23.65
24.96
7.05
40.69
8.12
5.83
4.02
6.8
3.79
6.22
3743
19433
19.21
330
914
0.77
12.85
2.19
7.07
16.35
131
131
71
73
0.66
10.24
24.01
16
16
10
8
0.71
9.54
Table 5: Descriptive statistics of the variables.
PREMIUM
A_SIZE
T_SIZE
RSIZE
PREV_OWN
T_EQUITY
T_LOAN
T_NII
A_EQUITY
A_NII
A_GASSET
T_GASSET
T_ROE
A_ROE
POWER
HERF
CRED_GDP
Minimun
.30
Maximun
9.76
Mean
2.1814
Standard
deviation
1.44777
13.81
11.01
.05
.00
.01
.02
-.01
.02
.00
-.10
-.34
-.38
-.17
.00
.01
65.13
19.98
19.33
216.95
98.89
.37
.95
.05
.23
.03
.34
.42
.36
.32
.20
.17
147.46
16.9398
15.1408
19.9245
15.8470
.0766
.4893
.0110
.0669
.0103
.1165
.0496
.0481
.0953
.0258
.0464
104.58
1.42469
1.98705
34.23798
28.80013
.05209
.19799
.00822
.03512
.00682
.09633
.12933
.12551
.06666
.05018
.03811
15.096
35
Expected
relationship with
the Premium
Positive
Negative
Negative or Positive
Negative
Negative
Negative
Positive
Positive
Positive
Positive
Positive
Positive or Negative
Positive
Positive
Positive
Positive
It is possible that the same bank belongs to different groups in different years, because it might change
its product specialization.
33
Table 6: Results of the regression analysis for the whole sample.
Model
(Constant)
1
2
3
4
5
6
6.153
(2.23)**
Yes
6.5079
(3.68) ***
Yes
6.4794
(3.51)***
Yes
8.8406
(2.68)***
Yes
9.439
(3.50)***
Yes
8.952
(3.16)***
Yes
Yes
Yes
Yes
No
No
No
-
-
-
CRED_GDP
-
-
-
T_EQUITY
-7.603
(-1.75)*
-3.721
(-2.25)**
0.138
(0.00)
8.083
(1.06)
-33.691
(-0.98)
-3.580
(-1.38)
-1.203
( -3.19)***
.2359
(0.20)
-.0124
(-1.98)*
-.5857
(-1.20)
3.228
(2.37)**
-1.3577
(-0.60)
.1041
(0.20)
-9.691
(-1.63)
-.3436
(-0.74)
-.1543
(-0.73)
.1921
(0.98)
.0083
(1.50)
-
-9.327
(-2.42)**
-3.805
( -2.33)**
-7.999
( -0.29)
9.102
(1.45)
-28.93
( -0.81)
-3.467
(-1.39)
-1.213
(-3.21)***
.5228
(0.45)
-.0133
(-2.27)**
-9.291
(-2.52)**
-3.809
(-2.48)**
-6.287
( -0.23)
8.9360
(1.45)
-29.49
(-0.85)
-3.564
(-1.48)
-1.228
( -3.28) ***
.4854
(0.43)
-.0134
( -2.43)**
4.2440
(1.08)
-.0266
(-2.52)**
-6.684
(-1.57)
-3.574
(-2.30)**
.4914
(0.02)
8.364
(1.09)
-38.47
(-1.17)
-4.065
(-1.48)
-1.187
(-3.16)***
.6906
(0.60)
-.0120
(-2.00)**
2.767
(0.72)
-.0263
(-2.49)**
-8.539
(-2.15)**
-3.707
(-2.42)**
-8.990
( -0.37)
9.226
(1.48)
-33.17
( -0.97)
-3.943
(-1.48)
-1.186
(-3.12) ***
1.126
(0.97)
-.0128
(-2.25)**
3.681
(1.07)
-.0243
(-2.16)**
-8.788
(-2.26)**
-3.748
(-2.55)**
-7.864
( -0.33)
9.262
(1.49)
-31.76
( -0.96)
-4.026
(-1.57)
-1.214
(-3.21) ***
0.9280
(0.80)
-.0135
( -2.56)**
-.6850
(-1.31)
3.324
(2.52)**
-1.985
(-0.89)
.0107
(0.02)
-7.669
(-1.43)
-.3047
(-0.68)
-
-.7297
(-1.41)
3.350
(2.67)***
-1.888
(-0.92)
-
-.1743
(-0.37)
3.525
(2.65)**
-1.765
( -0.80)
-.1371
(-0.27)
-8.972
(-1.77)*
-.3320
(-0.76)
-
-.3009
(-0.60)
3.699
(2.92)***
-1.473
( -0.72)
-
-
-
-
-
.0041
(1.03)
-
-
-.1254
(-0.28)
3.382
(2.49)**
-1.109
(-0.49)
-.0306
( -0.06)
-11.18
( -1.94)*
-.3736
(-0.82)
-.1727
( -0.80)
.2232
(1.13)
.0064
(1.11)
-
.0012
(0.32)
-
-
0.5149
0.5063
0.5011
0.4891
Time-Dummy
Variable
Country Dummy
Variables
HERF
T_LOAN
T_NII
A_EQUITY
A_NII
A_GASSET
CASH
T_GASSET
PREV_OWN
PREV_ACQ
T_ROE
A_ROE
NATIONAL
POWER
DIVERSIFICATION
A_SIZE
T_SIZE
RSIZE
RSIZE*NATIONAL
R2
-7.507
(-1.49)
-.3202
( -0.72)
-
.0053
( 1.31)
0.5095
-8.730
( -1.85)*
-.3171
( -0.73)
-
.0040
(0.95)
0.4924
Linear regression estimation using White correction. For each variable it is shown the value of the
parameter and Student-t in brackets.
* Significance at 10%, **significance at 5%, *** significance at 1%.
34
Table 7: Results of the regression analysis for a sample of acquisitions made by banks and a sample
of acquisitions made by savings banks and cooperatives.
12.73054
(3.33) ***
Yes
Savings Banks and
Cooperatives
(34 M&A)
18.64692
( 2.99) **
Yes
.6595388
(0.13)
-.0339306
(-2.89)***
-12.79544
(-1.82) *
-2.274602
(-1.62)
-16.77434
(-0.41)
7.287908
(0.58)
-36.68191
(-1.21)
.6552916
(0.31)
-1.431867
( -2.38) **
1.100019
(0.55)
-.0120939
( -1.55)
-.1014847
(-0.16)
1.615236
(0.81)
-5.501885
(-2.04 )*
-1.184556
(-1.67)
-8.040935
(-1.51)
-.813515
(-1.04)
-.2247794
( -1.02)
.0783579
(0.29)
.001832
(0.11)
0.6081
53.38513
(4.23) ***
-.1373409
(-6.06) ***
12.90663
(3.29)**
-9.677264
(-7.72) ***
80.10714
(3.07) **
-23.06386
(-2.70) **
-22.77779
(-0.56)
-9.913403
(-5.54)***
.5711454
(1.11)
7.579137
(3.36)**
-.1004479
(-5.62)***
1.113071
(1.28)
-9.459615
(-3.16) **
-19.9961
(-3.50)***
1.03167
(1.20)
-114.0801
( -3.75) ***
-1.267083
(-1.90)*
-1.62263
(-3.23) **
2.106473
(3.87) ***
.0228764
(2.03) *
0.9790
Banks
(47 M&A)
(Constant)
Time-Dummy
Variables
HERF
CRED_GDP
T_EQUITY
T_LOAN
T_NII
A_EQUITY
A_NII
A_GASSET
CASH
T_GASSET
PREV_OWN
PREV_ACQ
T_ROE
A_ROE
NATIONAL
POWER
DIVERSIFICATION
A_SIZE
T_SIZE
RSIZE
R2
Linear regression estimation using White correction. For each variable it is shown the value of the
parameter and Student-t in brackets.
* Significance at 10%, **significance at 5%, *** significance at 1%.
35