Bank M&A in Europe and US during crisis - Investment Management and Financial Innovations Volume 7 Issue 4 2010 Rafiqul Bhuyan(USA Sarina Ar-Loc

Bank M&A in Europe and US during crisis - Investment...

This preview shows page 1 - 2 out of 18 pages.

Investment Management and Financial Innovations, Volume 7, Issue 4, 2010 8 Rafiqul Bhuyan (USA), Sarina Ar-Loc Ng (USA), Mo Vaziri (USA) Do acquisitions create value? Evidence from the US and the European bank acquisitions during financial crisis Abstract This paper investigates the valuation effect on acquiring banks during different windows of events. The research is conducted on the US and the European banks mergers and acquisition during the period of 2004-2010 with special focus on bank mergers during the financial crisis of this decade. During this crisis period when many big banks are also on the verge of bankruptcy, many mergers and acquisitions take place in the United States and in Europe. Using tradi- tional event study methodology, the paper investigates the wealth effect on acquiring banks to understand the market reaction in bank acquisitions announcements. The authors observe those acquisition announcements, on average; create a 0.3% and 0.8% gain in the United States and in the European countries, respectively to the acquiring bank. When authors focus on banks with different size and location, they find that American acquiring banks lose 18% which em- ploy 10,000-100, 0000 and European banks lose 6% with the same employment size. Furthermore, American acquiring banks lose 17% and 12% that are headquartered in the Western and Midwestern states respectively. The results offer further evidence to the literature that, shareholders of acquiring banks face negative wealth effect even when they ac- quire other banks during crisis period. Keywords: acquisitions, mergers, banks, event study, bankruptcy, financial crisis. JEL Classifications: G21, G34. Introduction © The purpose of corporate mergers and acquisition is to create overall benefits to shareholders. The gains to the shareholders stem from the performance im- provement following the merger in areas such as efficiency improvements, increased market power, or heightened diversification, increased cost effi- ciency in scale and or scope, capital restructuring, raising capital adequacy, etc. In banking sector, for example, merged banks may offer several products at a lower cost than by separate banks each provid- ing individual products. Cost efficiency can also be improved by bringing more skilled workers through acquisition; acquiring management may enhance revenues by implementing superior pricing strate- gies, offering more lucrative product mixes, or in- corporating sophisticated sales and marketing pro- grams. Finally, banks may increase diversification by either broadening the geographic reach of an institution or increasing the breadth of the offered products and services. Greater diversification also provides value by stabilizing returns, lowering vola- tility and bankruptcy cost, and increasing capital adequacy in lending practices. Stock price reaction in the announcement of mergers and acquisition is widely researched by academicians and practitioners bring evidence that it creates value for the share- holders. However, merger and acquisition activity
Image of page 1
Image of page 2

You've reached the end of your free preview.

Want to read all 18 pages?

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes