This dissertation attempts to investigate, the impact of Mergers & Acquisition (M&A) on shareholder wealth in the European banking industry from 2003-2007 and explains in depth detail of the literature reviewed by the author to provide the basis of the successful achievement of the project. M&A has been a popular research topic in finance with broad literature exists on M&A. For this review to be achievable, a broad search for information was undertaken by means of the internet and library. The research question will examine the wealth effects (abnormal returns) of M&A involving European banks using `event study` methodology over the period of 2003-2007 in both the announcement period and long run post acquisition period. In other words, can M&A improves or destroy shareholder wealth of the targets, bidders and combined firms.

1.2 Introduction

The decade of 1990 saw the biggest increase in European M&A activity. Merger & Acquisitions (M&A) have been a significant phenomenon in the Europe. and the world economy which symbolizes one of the most important strategic decisions made by managers and shareholders of the engaged firm. Sudarsanam (2003,para1,p.1) argues shareholders and managers may be the most important stakeholders in M&A but other groups such as workers, competitors, lenders, customers all have a collective interest in this activity.

M&A may be undertaken in order to replace an inefficient management, but sometimes two businesses may be more valuable together than apart. Motivation behind the mergers is to maximise the shareholders wealth. However, according to Jensen and Ruback (1983) and Sirower and O`byrne (1998), in almost two third of cases, mergers produce wealth gains for target shareholders and more or less zero gains to acquirers. Various studies have found that, usually the announcement of bank mergers neither create nor destroy shareholders value Pilloff and Santomero (1998). Also, some studies indicates that the announcement of certain types of bank mergers do create value, if that merger reduce costs.

Berger, Demsetz, Strahan (1999) identified five fundamental dynamic factors that motivate corporate takeovers i.e. an increase of globalization, technological progress, financial deregulation, changes in customer demand and the integration of financial markets. Arnold (2005, para2, p.1041), defined mergers as the combining of two business entities under common ownership whereas Bruner (2005) states it as consolidation of two firms that creates a new entity in the eyes of the law.

According to Investorwords.com acquisition is a acquiring control of a corporation, called a target, by stock purchase or exchange, either `hostile` or `friendly` which also be called takeover. E.g. in October 2007, Royal bank of Scotland (RBS) merged with Dutch bank ABN Amro to clinch Europe’s biggest ever banking takeover with 86% of ABN Amro’s shareholders accepting a 71bn euro (Ft.com). Bruner (2005) argues takeover activities are strategic transactions that could turn out to be an excellent investment of capital and resources.

1.3Merger waves

Nowadays, M&A is well known fact that comes in waves according to evidence from Bruner (2005), Gorton, Kahl & Rosen (2005), Martynova & Renneboog (2006). Five individual merger waves were observed in the UK economy in the last century i.e. 1900`s, the 1960`s, the 1970`s, the 1980`s and the 1990`s. (Kastrinaki, Stoneman 2007)

Brankman, Garretsen, Van Marrewijk (2008) argues that, in terms of economic importance, the dominant merger wave unpredictable is the positive global outcome, suggesting that M&A waves are an economy wide global phenomenon. The wave of bank mergers has been established to explain the diverse theories e.g. the `efficiency hypothesis` expect that mergers improve efficiency and help poor banks to survive as competition becomes increasingly rigorous in the banking industry. Gugler, Mueller, Yurtoglu (2004) finds that merger waves can be implicit if one identify that M&A do not boost efficiency and doesn’t increase shareholders` wealth but instead sited that M&A waves are best come across as the answer of overvalued shares and managerial opinion.

1.4Why do M&A occur?

In various European countries, mergers have allowed banks to increase efficiency by assisting the coordination of the closing of branches. Banks shareholders and managers need to recognize the potential sources of economic gain emerged from M&A. Banks can reduce costs and increase value in different ways e.g. diversification. I.e. if mergers generate cost synergies such as economies of scale, banks can reduce expenses.