Annual Review Presentation!!! Final

8/12/2019 Annual Review Presentation!!! Final

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1stYear PhD

Annual Review

Research Title:

The global financial crisis and its impact onbanking M&As in the European Union

PhD Candidate: Mykhailo Iasinskyi

Supervisors: Dr Beat Reber

Dr Dev Vencappa

Student ID: 4213471


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Presentation Plan:

1. Research background

2. Literature review

Theoretical studiesEmpirical studies

3. Contribution

4. Data and methodology

5. Timeline to completion


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The Background of the Research

Factors influencing changes in banking M&Amarket over last 2 decades:

1. Technological progress;

2. Globalisation of financial markets;

3. Improved supervision and regulatory environment;

4. Introduction of the Euro;

5. Establishment of the European Single Market.


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Explanations in the academic literature:

Procyclical behaviour (over-lending during upwardphase and over-cautious lending during downwardphase (Goddard et al.,2007 );

Informational asymmetries;

Herd behaviour;

Institutional memory (Altman et al., 2005), Berg et al.,2005), Bikker and Metzemakers, 2005)


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Merger waves in history:

Period Name Special attributes

1897 - 1904 First wave Horizontal mergers1916 - 1929 Second wave Vertical mergers

1965 - 1969 Third wave Conglomerate mergers

1981 - 1989 Fourth wave Hostile takeovers, junk

bonds-driven LBOs

1992 - 2000 Fifth wave Global and cross-bordermergers

2003 - 2008 Sixth wave High volumes, cross-border mergers,

shareholders activism


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Recent merger waves in the EU banking:

Fifth merger wavecharacteristics

- growth in cross-border deals;- large number of strategic

bidders;- extreme losses suffered by

acquirers;- ended after dot.com crash (2000)

Sixth merger wavecharacteristics

- motivated and driven byexcessive liquidity;

- therefore large stake of cash-financed mergers;

- high volumes of merger deals;- ended after subprime mortgage

market crashed (2008)


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Figure 2. Number of financial institutions in the EU:

Source: ECB Press release, 21 Jan. 2014


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General characteristics of banking M&As inthe EU:

Almost 30% of deals number and 40% of total dealsvalue in all European mergers;

Prevalence of low-volume domestic deals in the 1990s;

Countries with the most intensive merger activities:Germany, France, Italy, Austria;

Relatively low number of cross-border deals (


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Figure 3. Cross-border penetration in the EU financialsector

Source: ECB Monthly Reports


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General characteristics of banking M&As inthe EU:

Almost 30% of deals number and 40% of total dealsvalue in all European mergers;

Prevalence of low-volume domestic deals in the 1990s;

Countries with the most intensive merger activities:Germany, France, Italy, Austria;

Relatively low number of cross-border deals (


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Explanation of low level of cross-borderactivities:

Ineffective merger control;

Misuse of political and regulatory powers;

Disharmonised taxation systems in EU members;

Differences in language and culture.


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Mechanism of external shock caused by globalfinancial crisis:

Credit boom and easy access to liquidity undermined long-term riskassessment by banks;

Subprime mortgage market crashed in late 2007, leading to downturn inAmerican markets

Collapse of Lehman Brothers triggered liquidity shortages in the US and theEU banking systems;

Banks restricted operations and crisis began to influence the real economysector.


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Broad research question:

What is the impact of crisis on the European banking M&As?

General research questions:

How do the European banking mergers perform during crisis?

What are the most important factors that determine banking

M&As after the sixth merger wave?

What are the possible consequences of new post-crisis regulatory

initiatives for the EU banking M&As (e.g. seventh merger wave?)


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Literature Review

Motives of banking M&As:

1) Value-maximizing motives synergy

economies of scape and scope

increased market power

risk diversification

capital strength

2) Non-value maximizing motives agency motives

hubris


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Literature Review

Value-maximizing motives of banking M&As:

I. Synergy

[ ( + )] ( + ) = the combined value of the two banks

= bank A measure of its value (acquirer)

= the market value of bank B stock (target) P = premium paid for target bank

E = expenses of the acquisition process


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Literature Review

Synergy sources according to Lawrence (2001):

Operating economies

Financial economies

Increased market power


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Literature Review

Financial synergy sources:

1) Tax advantages (Myers and Majluf, 1984)

2) Lower costs of internal funds due to better matchbetween resources and investment opportunities

(Palepu, 1986)

3) Better debt protection (due to larger assetbacking)(Higgins and Schall, 1975; Kim and McConnell,

1977)


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Literature Review


II. Economies of scale and scope

Examples: Closing redundant branches;

Consolidation of back offices;

Optimization of payment systems.

to distribute fixed costs overhigher output

Economy ofscale

to offer wider range of servicesexploiting existing facilities

Economy ofscope


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Literature Review


III. Increased market power

Sources (according to Gaughan, 1996):

Product differentiation

Barriers to entry

Market share


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Literature Review


IV. Capital strength

One of the most important motive in the modern EUbanking;

In terms of strong impact of external liquidity shock,banks try to reach high capital adequacy and assetquality via M&As.


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Literature Review

Non-value-maximizing motives of bankingM&As:

I. Agency motive

M&As are considered as mechanism of substituting ineffective

managers (Manne, 1965);

Management tries to maximise their wages by maximising the

bank size empire-building(Mueller, 1969; Murphy, 1999);

Alternative theory: managers draw attention to the company by

participating in M&As (given developed rankings

system)(Ravencraft and Scherer, 1987)


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Literature Review

Non-value-maximizing motives of bankingM&As:

II. Hubris

Classic theory by Roll, 1986 firms compete for target company,

but lose the vision of fair value and winner pays much higher

price (winnerscurse);

Individual hubris worst-performing deals are performed by

best performing companies, as their managers believe in their

constant and faultless estimation and strategic plans (Morck et al,

1990)


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Literature Review

Determinants of banking M&As:1) Internal determinants

Target operating performance

Capitalisation

Prospects for future growth

Size

Management incentives

2) External determinants

Deregulation and laws Macroeconomic environment

Technological development

Globalisation


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Literature Review

General theoretical patterns of internaldeterminants:1. Less profitable banks are more likely to be acquired (Hannan

and Piloff, 2006);

2. Less capitalised banks are more likely to be acquired (Lanine

and Vander Vennet, 2007) mixed evidence! (Akhigbe et al.,2004 have opposite results);

3. Slower growing banks are more likely to be merged (Lanineand Vander Vennet, 2007) - mixed evidence! (Pasiouras et al.,2007 have opposite results);

4. Smaller banks are more likely to be acquired (Pasiouras et al,2007);

5. Management is always opposing mergers, especiallyparticipating in management ownership schemes (Hadlock etal, 1999)


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Literature Review

Key European regulatory initiatives in M&Acontrol:

Adoption of Single Banking Initiative(creation of universal banking model in the

EU)(Nellis, 2000)

1992Adoption of Financial Services ActionPlan (unification of accounting practicesand prudential rules)(Hamoir, 2005)

1999Basel II Accord (establishing obligatory

conditions of capitalisation for the financialinstitutions)(Kanbay, 2005)

2004


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Literature Review

Impact of the technological development onthe EU banking M&A market:

Increase in production (credit

cards)

Enhanced efficiency in riskmanagement (derivatives)

Economies of scale (economicresearch)


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Literature Review

Impact of macroeconomic environment on theEU banking M&As:

1. Cycles of capital markets are synchronised with M&Acycles (Mueller, 1989);

2. GDP and inflation growth have positive influence onbanksperformance and, therefore, on the positive M&Aoutcomes (King and Levine, 1993; Rajan and Zingales,1998);

3. Unemployment rate, interest rate and productionproductivity are in mixed correlation with the financialsector performance (Molyneux and Thorton, 1992;Pasiouras and Kosmidou, 2005)


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Literature ReviewImpact of deal characteristics on performance:

1) Mood of the deal: mixed results (Gregory, 1997 and Cosh andGuest, 2001find that hostile deals outperform friendly deals;while Goergen and Renneboog, 2004 provide oppositeevidence);

2) Listed status: mergers with private banks involved

outperform public mergers (Draper and Paudyal, 2006)3) Method of payment: cash-financed deals outperform stock-

financed deals (Loughran and Vijh, 1997; Myers and Majluf,1984);

4) Acquirer/target relative size: mixed evidence; deals withlarger target banks show higher CARs (Bruner, 2002),however Sudarsanam, 1996 find negative relationship;

5) Merger experience: frequent bidders enjoy higher abnormalreturns(Baker and Limmack, 2001)


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Literature Review

Operating performance studies (levels of

study):1. To reveal overall performance patterns (sometimes with

focus on deal types, payment methods etc.)

2. To examine factors of performance changes (cost

reductions and profit improvements)

3. To investigate the time scale over which performance

changes are actualized (with focus on synergy effects

timing etc.)


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Literature Review

Operating performance studies:

1) Generally, mixed evidence: several papers report zerochanges in operating performance (Zollo and Singh,2004; Akhavein et al., 1997); however, Cornett et al., 2006testify significant positive gains for combined entities;

2) EU context shows mixed results: while Vander Vennet,2002; Campa and Hernando, 2006 find positive changes,Altunbas and Ibanez (2004) report no changes in theoperating performance;

3) The latest studies testify significant profit efficiencies(Chronopoulos et al., 2011, Chronopoulos et al., 2013);

4) Studies on national markets show negative results forSwitzerland and Italy (Rime and Stiroh, 2003; Casu andGirardone, 2002).


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Contributions

- The research aims to estimate the impact of financialcrisis on the European financial mergers andacquisitions.

- M&As during pre-crisis period, crisis period and post-crisis period will be assessed and compared;

- Thesis aims to establish relationship betweenmacroeconomic/legal environment and the market of

financial M&As;

- The objective of the thesisis to capture the wide rangeof factors that influence banking M&As, providingcomplex approach to the problem.


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ContributionsResearch questions:

1. What are the main differences between post-merger performancepatterns in European banking in periods of crisis and economicupturn? What factors have contributed to the post-merger effectsfor banks and financial institutions?

2. What are the post-merger efficiency changes for the deals that took

place during the financial crisis comparing to pre-crisis takeovers?3. What is the effect of pre-crisis and crisis macroeconomic

environment on the European banking mergers in terms ofuncertainty?

4. How regulatory and legal environment influence the M&A

processes in the European banking sector and what are results forbanks in different legal systems?

5. What is the effect of capital requirements on merger performancein the European banking sector during financial crisis?


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Methodologies1. Short-term event study: to determine short-term abnormal

returns for participants in banking mergers in three different

periods: pre-crisis (1990-2006), crisis (2007-2009) and post-crisis (2009-2014)(Brown and Warner, 1985);

2. Long-term event study: long-term abnormal returns for EUmerged banks will be evaluated (buy-and-holdmethodology)(Ritter, 1991; Barber and Lyon, 1997)

3. Regression analysis will contain GARCH technique tocapture volatility effect during crisis (according tomethodology by Savickas, 2003; Maditinos et al., 2009);

4. Accounting data analysis techniquesimilar to one in Healyet al., (1992)will be implemented to assess merged European

bankspost-acquisition performance;5. Logistic regression will be deployed to evaluate the

probabilities of banking institutions to merge underregulatory pressure (Basel III Accord)(following Hernandoand Nieto, 2009).


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Methodologies1. Short-term event study:

+ ; (), therefore:

=

=

=

=

where: - market return;- company return; , -coefficients; - cumulative abnormal return

2. Long-term event study:

1 + (( 1 + ))=

=

where: T is number of months after trigger event; - buy-and-hold return; - companyreturn for month t.


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Data Main source:Datastream and Thomson Financial Database;

Data coversperiod between January 1st, 1990 and February 20th,2014 which resulted in 13988 transactions;

Data includes countries of European Union (28 members),Switzerland and Norway;

Restricting criteria:

1) the stake of acquired shares should be more than 50%;2) the involved companies should belong to financial sector;

3) the target and bidder are listed;

4) the target and bidder companies should be registered or

headquartered in the European Union, Switzerland orNorway.

After preliminary exclusion of deals with absent data, 1400transactions remained.


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The Timeline to CompletionStage Timeline

July August, 2014 finishing and updating literature review based

on Annual Review Assessment comments and

feedback

September October, 2014 preliminary data collection, ensuring access to

the databases

October November, 2014 optimising models and research

methodologies, finalising model specification

November - December, 2014 final data collection

January - March, 2015 structuring the collected data, constructing

sample for the research chapters

April May, 2015 empirical work, testing the hypothesis,

structuring results

June, 2015 presenting 2ndyear Annual Review

July November, 2015 finalising empirical part

November 2015 April 2016 writing up of the thesis

April May, 2016 finalising and editing

June 2016 presenting thesis at viva voce

Documents

Annual Review Presentation!!! Final