How Mergers and Acquisitions affect listed Banks* · • Zollo and Leshchinkskii (2000) – Value creation margins for the bidder’s stakeholders depend on: bidder’s ... (see next

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Andrea RestiUniversità di Bergamo

[email protected]

How Mergers and Acquisitionsaffect listed Banks*

*Co-author: Lucia Galbiati

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Outline of this presentation

• Experimental Setup– Aims and scope– Methodological Framework– Previous Literature– Sample

• Results– Overall Results– Univariate Analysis of targets and bidders– Multivariate Analysis of targets– Combined (target+bidder) value creation

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Aims and Scope of the Research

• In the last 15 years a huge wave of bank M&Astook place in the main advanced countries– Did those M&As create or destroy value?– What types of M&As scored comparatively better?

• Two approaches exist to answer such questions:– Analyze efficiency/profitability ratios taken from the

financial statements• Takes time (e.g., three years after the merger)• Aggregates may not be homogeneous

– Analyze the market’s reaction (shift in stock prices) when the M&As were announced

• Did the market “believe” in those deals? And how much?• This is the approach followed in this research.

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Why to focus on Stock Prices?• Prices are the result of the behavior of many

informed, reactive, motivated investors– They incorporate an evaluation of the past, as well as

expectations on future developments• Prices are a signal, through which minority

shareholders can express their dissent• In short, prices embed the market’s opinion on the

economic viability of the discosed merger plan

The target’s shareholders

cash in the “majority

premium” paid for corporate

control

The target’s shareholders

cash in the “majority

premium” paid for corporate

control

The buyer’s shareholders may not “believe” in the value creation objectives set out by their own managers

The buyer’s shareholders may not “believe” in the value creation objectives set out by their own managers

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Methodological Framework: CAR (Cumulated Abnormal Returns)

Market returns (e.g. S&P500)

Ret

runs

on B

ank

XY

+5,5%

+5%

+4%

+3%

In “normal” times, the returns on a stock reactto those fo the market, according to their “beta”

After an M&Aannouncement, returnsmay differ from those“forecast” by the beta

We can sum all redvertical segments in the days around the M&Aannouncement, to checkif this cumulatedabnormal return (CAR) isstatistically differentfrom zero.

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Cumulated Abnormal Returns:some inferential tests

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car Nt1 =

scar Nt2 =

1/2N

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−= BA

Average CAR on N deals

Average variance of the N CARs

Mean of the standardised CARs

Weighted average CAR (weightsdecrease as variances increase)

Average CARs of 2 groups

Mean variances of the 2 groups

Asymptotic test on average CARS intwo subsamples

(H0: CARA = CARB)

Asymptotic test on average CARS intwo subsamples

(H0: CARA = CARB)

Asymptotic testson the average

CAR (H0: CAR = 0)

Asymptotic testson the average

CAR (H0: CAR = 0)

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A brief Literature Review:some Studies on US Banks

• Hannan and Wolken (1989)– A wealth transfer takes place between the buyer’s and the target’s

shareholders. No evidence of net wealth creation is found– The value decrease in the buyer’s stock is stronger when the target’s

size is large (suggesting a less “manageable” M&A)• Hawawini and Swary (1990)

– The buyer’s value decrease is more than offset by the target’s rise Houston and Ryngaert (1994)

– Bidders are more efficient than targets, and than the industry average– The market reacts better to M&As announced by high-performance

buyers and between banks with a strong geographic overlapping• Ferretti (2000), bidders only

– Prices do not react univocally: CARs look more negative in recent years• Zollo and Leshchinkskii (2000)

– Value creation margins for the bidder’s stakeholders depend on: bidder’s size, target’s asset quality, bidder’s management skills during the implementation phase

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A brief Literature Review/2:some (few!) Studies on Europe

• Structural limitations– Less observations are available– Cross-country analyses are hindered by national segmentations

• Beitel and Schiereck (2001) – Based on 54 European M&As: most have prompted a favourable

reaction in prices– This is especially true for domestic deals, while cross-border

M&As have induced a value decrease• Cybo-Ottone and Murgia (2000)

– Cross-border mergers in Europe destroy value– The best CARs are associated with domestic M&As aimed at

gaining a significant overall market share and/or at diversifying earnings. “Manageable” size deals are also rewarded by the market

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Structure of the Sample

114 targets

114 targets

209bidders

209bidders

221 deals221 deals

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Other methodological Choices

• Announcement Day (AD)– The day when a press-release was issued or, if earlier– The day on which rumours were first reported by the

financial press, with a price estimate that proved to be reasonably close to the real one

• Source: Financial Times, Lexis/Nexis, Il Sole 24 Ore

• Event window– From ten days before the AD (to account for

information leaks) to ten days after• Alternate windows will be used when necessary

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Results/1: the overall Framework

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Results/1: the overall Framework

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-2,5%

+15%As expected, targets gain value while

bidders suffer

As expected, targets gain value while

bidders suffer

However, the latter

gradually recover the lost value:

does the market come to share the views of the

management?

However, the latter

gradually recover the lost value:

does the market come to share the views of the

management?

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Results/2: univariate analysis Even versus “unbalanced” M&A

“Unbalanced” M&A = the target’s total

assets are less than 20% of the bidder’s

“Unbalanced” M&A = the target’s total

assets are less than 20% of the bidder’s

Bidders suffer less, because the financial impact of the control premium is smaller, execution risks are

more manageable…

Bidders suffer less, because the financial impact of the control premium is smaller, execution risks are

more manageable…

…however notbecause the price for control is lower (see

target CARs)

…however notbecause the price for control is lower (see

target CARs)

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Results/2: univariate analysis Even versus “unbalanced” M&A

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Results/2: univariate analysis Small versus large targets

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Results/2: univariate analysis US, Europe and Italy

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Results/2: univariate analysis US, Europe and Italy

CARs appear to be slightly lower for

Italian targets (18)

CARs appear to be slightly lower for

Italian targets (18)

…bidders, however, show the most

strinking differences (see next slide)…

…bidders, however, show the most

strinking differences (see next slide)…

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Bidders in Italy and Europe

For European bidders the “bad news” is quickly overcome by the market

For European bidders the “bad news” is quickly overcome by the market

Italian ones cannot fill the “confidence gap” between managers and market?

Italian ones cannot fill the “confidence gap” between managers and market?

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Results/2: univariate analysis before and after the “price bubble”

after

before

Target’s CARsincrease (from

+10.4% to +22.3%), bidders suffer less.

Target’s CARsincrease (from

+10.4% to +22.3%), bidders suffer less.

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Results/2: univariate analysis targets before/after the “bubble”

After the bubble targets continue to earn long after the announcement: the rally is not only driven by the bid price but also by an evalutation of the value creation prospects for the target?

After the bubble targets continue to earn long after the announcement: the rally is not only driven by the bid price but also by an evalutation of the value creation prospects for the target?

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Results/2: univariate analysis bidders before/after the “bubble”

During the bubble, CARs are markedly and persistently below zero. After the bubble, the

decrease is limited and quickly compensated in the following 20 days.

Are deals perceived as more credible in a “poor”

market environment?

Did banks improve their investor-relation skills over the latest years?

During the bubble, CARs are markedly and persistently below zero. After the bubble, the

decrease is limited and quickly compensated in the following 20 days.

Are deals perceived as more credible in a “poor”

market environment?

Did banks improve their investor-relation skills over the latest years?

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Results/3: multivariate analysis of target CARs

• Targets exhibit high, lasting, statistically significant CARs– This is the most sizeable – although largely expected – result of

the univariate analysis– Bidder CARs tend to fade as the event window increases– Combined CARs (see below) are not different from zero

• We therefore decided to analyse the determinants of target CARs by means of a multivariate model

DUCASHPOSTCORRELAZXBORDER

BIDDUTTAQEFFTARROATARCAR

⋅+⋅+⋅+⋅++⋅+⋅+⋅+⋅+=

8765

4321

2000

120_

ββββββββα

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Results/3: multivariate analysisThe Model

DUCASHPOSTCORRELAZXBORDER

BIDDUTTAQEFFTARROATARCAR

⋅+⋅+⋅+⋅++⋅+⋅+⋅+⋅+=

8765

4321

2000

120_

ββββββββα

Target’s cost/income: no

scope forefficiency gains ifit is already low

++Ratio of target total assets tobidder TAs, ifabove 20%

--Dummy: 1 ifbidder’s tier1

capital below 6% (less resources)

--

Stock return correlation: when

negative, deal diversifies more

--

Target’s return on assets: profitablebanks are paid

more

++

Dummy: 1 ifannouncementafter March 31,

2000 (“poormarket”)

++Dummy: 1

if deal paid cash (better

reaction/lowerprice?)

??Dummy: 1 ifcross-border(overcome

barriers/lowerbenefits)

??

.. = expected effect

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Results/3: multivariate analysisThe Estimates

I II III IVConstant -0.32 -0.27 -0.25 -0.28ROATAR 0.06 0.05 0.04 0.05EFFTAR 0.01 0.01 0.01 0.01Q_TA20 -0.16 -0.16 -0.11 -0.12DUT1BID -0.17 -0.18 -0.19 -0.19XBORDER 0.10 0.12 0.12CORRELAZ 0.09 0.08POST2000 0.11 0.11 0.10 0.09DUCASH 0.01N. of obs 44 45 47 47R-square 0.43 0.43 0.4 0.38Adj. R-square 0.31 0.33 0.31 0.31

* White heteroskedasticity-consistent

Payments-in-cash, correlation (=diversification) and cross-border weresubsequently eliminated from the model, not being significant at the 5% level(blue-shadowed cells). Profitability, efficiency, relative size, capital tightenessand market conditions (“post2000”) seem to explain some 40% of total variance.

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Results/4: the combined effect

• Targets (smaller) enjoy a considerable rise in stock prices. Bidders (larger) suffer from a limited decrease.– Does this imply a zero-sum game?– Is the combined effect (and the net value creation) significantly different from

zero?• To check this, we simulated the investment in a stock portfolio including both

bidder and target (“combined”)– Both companies must be listed (69 observations)– Weights are given by market capitalizations

Estimation window Event window

EventTime

Combined Estimate betaCompute CAR

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-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

-40% -30% -20% -10% 0% 10% 20%

Car bidder

Car

targ

et

ρρρρ = +12%

Results/4: the combined effect

Group 1 Group 2 test p-valueDomestic (60) vs. cross-border (9) -1.10% -2.60% 0.5 59.1%Before (38) vs. after (31) March 2000 -3.20% 1.20% -2.1 3.5%Target TA / bidder TA < 20% (30) or > 20% (24) -2.10% -1.00% -0.5 62.5%Italian (13) vs. other European (17) -1.60% -0.20% -0.4 65.8%European (30) vs. US (39) -0.80% -1.60% 0.4 69.6%

CARs Equal means?

•The average combined CAR is -1.3%, not significantly different from zero.•However, no negative correlation isobserved between target and bidderCARs on an individual basis

•This is not a zero-sum game!•Univariate segmentations (see below) do not look significant, the onlyexception being the March 2000 watershed

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Summary of the main findings

• Target and bidder CARs are significantly different from zero– Bidders suffer less when targets are small

• Bidders’ CARs revert to zero in the long term– Targets earn more when bought from abroad, by large

banks and when the market trend is gloomy• Multivariate analysis confirms this, while showing that target’s

profitability and efficiency, as well as bidder’s capitalizationlevels, also matter.

• Combined CARs are not, on average, nonzero– However, no systematic “value transfer” emerges– Some deals actually destroy value (e.g., before 2000),

while others might create it

Andrea RestiUniversità di Bergamo

[email protected]

How Mergers and Acquisitionsaffect listed Banks*

*Co-author: Lucia Galbiati

Documents

How Mergers and Acquisitions affect listed Banks* · • Zollo and Leshchinkskii (2000) – Value creation margins for the bidder’s stakeholders depend on: bidder’s ... (see next