What factors determine whether mergers and acquisitions create value for shareholders in the banking industry?

Introduction-Background

There is a significant amount of debate around whether mergers and acquisitions do create value for bank shareholders, with Houston et al (2001, p. 1) arguing that “traditional studies fail to find conclusive evidence that bank mergers create value.” However, several other studies have revealed that bank mergers may create value in certain contexts, depending on how appropriate they are for each company and how they are managed and approached. As such, this dissertation will attempt to identify the various factors which determine whether mergers and acquisitions create value, and how these can be managed to ensure that bank mergers both create and maximise shareholder value.

Literature Review

Houston et al’s (2001) argument around the lack of value creation from bank mergers is based on a study of major bank mergers which occurred between 1985 and 1996. Their results showed that the prospect of a merger tended to result in positive revaluations of the share prices of both companies, with the result being that any benefits post merger were not reflected in share price movements after the merger completed. In addition, the majority of the value created was due to cost savings, instead of any increase in revenue, which meant that the merged bank would not show any significant revenue growth. In addition, the Bank of England (2007) examined a study which showed that whilst an announcement of an acquisition tended to have a positive impact on the share price of the target, it tended to have a negative impact on the market value of the acquirer, although this was only a short term phenomenon.

As such, and as Glenn (2007) demonstrated, many acquisitions involving banks led to a significant premium being paid by the acquiring firm over the market value of the target. This was found to be a function of the workings of the financial markets, rather than actual expectations of synergies or revenue growth, implying that the valuations of the target firms would tend to be inflated, and destroy any economic value the merger might create. However, Delong and Deyoung (2007) claim that the reason many studies fail to find any evidence of value creation in bank mergers is that large bank mergers are a relatively recent phenomenon, hence there is no best practice available to help managers manage them. This is supported by an investigation of over two hundred bank mergers in the US from 1987 to 1999, which shows that bank mergers performed better the more previous experience and knowledge there was to support them.