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FIN 468 Mergers & Acquisitions

FIN 468 Mergers & Acquisitions - Bank Mergers&...

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Unformatted text preview: Bank Mergers & Acquisitions Acquisitions 1 Consolidation Is Trend Consolidation s During 80s & 90s, more mergers occurred in During banking than any other industry. banking s Mergers were driven by economic pressures Mergers and lifting of restrictive regulations. and s Recent announcement of Citibank and Recent Travelers, Nations Bank and Bank America, Banc One and First Chicago Banc s Others are in the works. 2 How Do Mergers Add Value? How s Generate increased earnings (cash flow). – – – – – Entry into attractive new markets. Stronger product lines. Improved marketing/distribution of products. Improved managerial capabilities. Cost cutting. s Increasing market share. 3 What Makes A Merger Unattractive? Unattractive? s Dilution of earnings. – Dilution should not exceed 5%. – Some dilution expected because transactions Some are finance by stock exchanges & the EPS of the target and acquirer are not the same. the s As an investment its failure to earn As expected rate of return. expected s Payout takes in excess of 20 years. 4 Lowest Share of Cash in 10 Years Lowest 5 Cash Is Not “King” In Mergers Cash s In the three Megamergers announced ($160 In billion) in early 1998, not one penny of cash changed hands. changed s On the contrary, Wall Street continues to sell a On staggering amount of stock via new offerings. staggering s Corporations are starting to see their stocks as Corporations fully valued. fully s Price earnings multiples are still 20% below Price overall market (better than 40% discount of late 1980s and early 1990s. late 6 Pressure On Bank Profits Pressure s New competition for banks has developed New from both financial and non-financial firms. from s Banks & thrift institutions have lost the legal Banks protection of their funds & their monopoly on offering consumer savings accounts. offering s Banks’ position as credit-granting Banks’ intermediaries has been eroded by alternative lower cost forms of credit extension. lower 7 Structural Changes Among Insured Commercial Banks 1980-1992 Commercial 8 Federal Agencies’ Role In Mergers Mergers s Approval of bank mergers by FRB, OCC, Approval FDIC, and Justice Department. FDIC, s Merger Legislation-Bank Merger Act of 1966 Merger & Bank Holding Company Act of 1956 (Amended in 1966 & 1970). (Amended – – – National bank=OCC State non-member bank=FDIC State member bank=FRB 9 Agencies’ Approach To Merger Standards Standards s Product market. – US v. Philadelphia Nat. Bk. found commercial US banking a distinct line of commerce. banking – Only commercial banks are competition. s Geographic markets. – Considers markets shared by 2 or more banks. – Look at markets that might be monopolisitic. 10 Types of FDIC Transactions Options Dealing With Bank Failures Dealing s Purchase & assumption (P&A) – A sealed bid auction of failing bank’s » Good loans, premises, securities, & rights. – Winning bidder assumes liabilities of bank. – Winning bidders takes good loans and gets a Winning put-back of unwanted loans for 50 days. put-back – FDIC liquidates unwanted assets. 11C Types of FDIC Transactions Options Dealing With Bank Failures (Continued) (Continued) s Deposit Payoff or Modified Payoff. – – – Failing bank is liquidated. Only insured depositors are sure to be paid. Uninsured depositors are partially paid off Uninsured (modified payoff) from residual asset values. (modified s Insured Deposit Transfer. – Deposits & services transferred to a healthy bank Deposits (instead of paying depositors). (instead – FDIC gives the receiver certificates for uninsured FDIC deposits. deposits. 12C Types of FDIC Transactions Options Dealing With Bank Failures (Continued) (Continued) s Open bank assistance. – Acquiring bank assisted in acquiring failing Acquiring bank by cash infusion. bank – FDIC taks notes or preferred stock of acquirer. – Failing bank is not closed. 13C Types of FDIC Transactions Options Dealing With Bank Failures (Continued) (Continued) s Whole bank or total asset P&A. – Acquirer submits bid (usually negative) for all Acquirer assets of failing bank; put-back not permitted. assets – Acquirer files management plan, capital plan, Acquirer collection program, & other intentions with FDIC. collection – Bids usually required within 48 hours. s Bridge bank. – FDIC operates failing bank for time necessary to FDIC identify a qualified buyer. identify 14 Deregulation of Interstate Banking Banking s McFadden Act (1927) & Douglas Amendment McFadden to the Bank Holding Company Act (1956) blocked bank expansion across state lines. blocked s Laws liberalized concerning bank expansion Laws with Garn -St. Germain Depository Institutions Act of 1982. Act s States passed legislation after Supreme Court in States Northeast Bancorp v. Board of Governors FRB ruled in favor of regional reciprocal laws (1985) (1985) 15 Non-financial Matters Affecting Mergers & Acquisitions Mergers s Avoid post merger financial & operational Avoid complications. complications. s Retain best employees of the acquired bank. s Keep the acquired bank’s best customers. s Maintain the beneficial aspects of the Maintain acquired bank’s culture. acquired 16 ...
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