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Chapter Nineteen

Acquisitions and Mergers in FinancialServices Management

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Key Topics Merger Trends in the United States and

Abroad

Motives for Merger

Selecting a Suitable Merger Partner

U.S. and European Merger Rules

Making a Merger Successful Research on Merger Motives and Outcomes

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Motives Behind the Rapid Growth in

Bank Mergers

Profit Potential

Risk Reduction

Rescue of Failing Banks

Tax and Market-Positioning Motives

Cost-Savings orEfficiency Motive

Mergers as a Device forReducing

Mergers as a Device forMaximizing Competition

Managements Welfare

Other Motives

Forces of Consolidation and Convergence:

Since 1980 more than 10,000 mergers among US-insured

depository institutions.

Why?

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Some Recent Acquisitions in the

Credit Crisis of 2007

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Merger Motives Identified By Bank

Executives and Employees

Quality of Management

Profitability (Return on Assets) Efficiency of Operations

Maintenance of Market Share

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Quick Quiz What is consolidation? Convergence?

Why are there so many mergers each year inthe financial-services industries?

What factors seem to motivate mostmergers?

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Selecting a Suitable Merger Partner

The Most Important Goal of AnyMerger Should Be to Increase theMarket Value of the Surviving Firm.

Where annual expected dividends per share are represented by E(Dt) and c

is the opportunity cost of capital

tt

1t)c1()D(EstockofshareperpriceMarket

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How Can The Maximization Goal beAchieved? Improve Operating Efficiency (reduce

operating cost per unit of output)

Consolidate Operations and EliminateDuplication

Geographic Diversification

Product Line Diversification

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Impact on Earnings Per Share

Generally Speaking Shareholders of Both theAcquired and Acquiring Firm Will Gain If:

1. Bank with Higher P/E Ratio AcquiresBank with

Lower P/E RatioAnd If:

2. Combined Earnings Do Not Fall Afterthe Merger

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Merger Premium

As Long as the Acquiring Institutions P-ERatio is Larger Than the Acquired Firms P-E

Ratio, There is Room for Paying MergerPremium.

A Merger Premium is Paid if the AcquiringBanks Shareholders Receive More Than theCurrent Market Price for Their Stock

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Exchange Ratio

The Number of Shares of Stock Offered By

an Acquiring Bank for Each Share of Stockof the Acquired Bank

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Dilution of Ownership

Dilution of Ownership Occurs When the

Acquiring Bank Offers an Excessive Numberof Shares to the Acquired BankShareholders. The EPS Will Fall Below itsOriginal Level for the Acquiring Bank When

This Happens.

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Principal Factors of Target Firm to

Consider The Banks History, Ownership and

Management The Condition of Its Balance Sheet The Firms Track Record of Growth and

Operating Performance The Condition of Income Statement

The Condition and Prospects of the LocalEconomy Competitive Structure of the Market Area

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Other Characteristics of the Target

Firm to Examine The Comparative Management Styles of the

Merging Organizations The Principal Customers the Targeted Bank

Serves Current Personnel and Employee Benefits Compatibility of Accounting and

Management Information Systems of the

Merging Organizations Condition of the Banks Physical Assets Ownership and Earnings Dilution Before and

After the Proposed Merger

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Purchase of Assets Method of

Purchasing Another Bank

A Method of Carrying Out a Merger inWhich the Buying Company PurchasesAll of the Assets of the Acquired FirmUsing Either Cash or its Own Stock

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Purchase of Stock Method ofPurchasing Another Bank

A Method of Consummating a Merger

in Which the Acquired Firm Ceases toExist; The Acquiring Firm Assumes allof its assets and Liabilities; Exchanges

its Equity Shares for the Stock of theAcquirer

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Regulatory Rules for Bank Mergers in the

US: Bank Merger Act, 1960

First Major U.S. Law to Bring MergingBanks Under Federal Supervision,Requiring Government Approval toMerge with or Acquire Other Banks

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Under the Bank Merger Act

Merger Must Be Approved By PrincipalRegulator

National Banks Comptroller of the Currency State Member Banks Federal Reserve State Insured Banks FDIC

Regulatory Agency Must Give Top Priority toCompetitive Effects

Mergers with Anti-Competitive Effects MayBe Approved if it Can Be Shown That ThereAre Significant Public Benefits Such AsProviding Convenient Services or Rescuing a

Failing Bank

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Herfindahl-Hirschman Index (HHI)

Measure of Market Concentration It is the Sum of the Squared Market Share for

All Banks in a Specific Market Area Department of Justice (DOJ) Guidelines

Postmerger HHI Below 1000, then the marketis unconcentrated, no further action;

Moderately Concentrated Market (HHIbetween 1000-1800) and change in

HHI

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Keys to Merger Success

Acquirer Must Start By Evaluating Its Own FinancialCondition

Must Have Detailed Analysis of Possible New Markets Must Establish a Realistic Price for Target Firm Afterwards Combined Team Must Direct Progress

Towards Consolidation Must Establish Communication Between Senior

Management and All Employees

Must Create Communication Channels forCustomers and Employees to Understand WhyMerger Took Place

Should Create Customer Advisory Panels to Evaluateand Comment on Merged Banks Image and Products

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Quick Quiz What factors should a financial firm

consider when choosing a good merger

partner? What factors must the regulatory authorities

consider when deciding whether to approveor deny a merger?

When is a market too concentrated to allowa merger to proceed?

Does it appear that most mergers serve thepublic interest?