im22 - Chapter 22 Bank Mergers and Acquisitions Chapter...

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Chapter 22 Bank Mergers and Acquisitions Chapter Objectives 1. Examine recent trends in merger activity. 2. Analyze procedures for valuing banks for acquisition or sale. Discuss the financial characteristics that affect sale price. 3. Explain why mergers presumably add value. 4. Describe how non-monetary considerations affect the valuation and post-merger success of the new bank. 5. Describe the features of mergers that make them unattractive. 6. Provide a sample application of various valuation techniques. Key Concepts 1. There is an overcapacity problem in banking. The U.S. has more banks than necessary to provide banking services. Mergers and acquisitions will reduce the number of competitors. 2. In recent years, geographic restrictions have been largely eliminated so that U.S. banks can expand across state lines. As noted in Exhibit 22.2, many of the largest U.S. banks have gained size and market share by buying other banking institutions. 3. Merger value is created when the combined entity can generate increased earnings immediately, or alternatively can expand market share and generate increased earnings later. The sources of earnings growth include: entry into new markets, stronger products, improved marketing and distribution of products, all of which presumably lead to greater revenue; and improved management and cost cutting. 4. Traditional benefits of size include product diversity, improved brand identification, reduced fixed-costs necessary to distribution of products/services, improved operating leverage, and reduced earnings risk. Mergers presumably add value by cost cutting, economies of scale, increased market share, enhanced product lines, entry into new attractive markets, improved managerial capabilities and increased financial leverage. 5. A widely cited standard for financial performance is that a transaction should not dilute earnings per share by more than 5% for the acquiring bank. 6. The standard procedures for valuing a bank are: a. premium to book value comparisons b. premium to adjusted book value comparisons c. price to earnings per share comparisons d. price to prevailing stock price analysis e. earnings per share dilution constraints f. minimum return on investment criteria 7. Parties to a merger consider a variety of non-financial issues when evaluating the costs and benefits of the merger or acquisition. These include: a. impact on the number and morale of employees b. can the bank’s culture be maintained? c.
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This note was uploaded on 04/14/2010 for the course BANK 2312 taught by Professor William during the Spring '09 term at 東京大学.

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im22 - Chapter 22 Bank Mergers and Acquisitions Chapter...

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