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CHAPTER NINETEENMergers And Acquisitions:
Managing The Process
The purpose of this chapter is to understand why the financial services industry undertakes so many mergers each year and to determine what legal, regulatory and economic factors should be considered when the management of a financial services provider wants to pursue a merger.
McGraw-Hill/IrwinBank Management and Financial Services, 6/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Motives Behind the Rapid Growth in Bank Mergers
Profit PotentialRisk ReductionRescue of Failing BanksTax and Market-Positioning MotivesCost-Savings or Efficiency MotiveMergers as a Device for Reducing CompetitionOther Motives
McGraw-Hill/IrwinBank Management and Financial Services, 6/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Merger Motives Identified By Bank Executives
Quality of Management
Profitability (Return on Assets)
Efficiency of Operations
Maintenance of Market Share
McGraw-Hill/IrwinBank Management and Financial Services, 6/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Most Important Goal of Any Merger
The Most Important Goal of Any Merger Should Be to Increase the Market Value of the Surviving Firm.
McGraw-Hill/IrwinBank Management and Financial Services, 6/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Impact on Earnings Per Share
Generally Speaking Shareholders of Both the Acquired and Acquiring Firm Will Gain If:
1. Bank with Higher P/E Ratio Acquires Bank with
Lower P/E RatioAnd If:
2. Combined Earnings Do Not Fall After the Merger
McGraw-Hill/IrwinBank Management and Financial Services, 6/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Merger Premium
A Merger Premium is Paid if the Acquiring Bank’s Shareholders Receive More Than the Current Market Price for Their Stock
McGraw-Hill/IrwinBank Management and Financial Services, 6/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Exchange Ratio
The Number of Shares of Stock Offered By an Acquiring Bank for Each Share of Stock of the Acquired Bank
McGraw-Hill/IrwinBank Management and Financial Services, 6/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Dilution of Ownership
Dilution of Ownership Occurs When the Acquiring Bank Offers an Excessive Number of Shares to the Acquired Bank Shareholders. Often the EPS Will Fall Below its Original Level for the Acquiring Bank When This Happens.
McGraw-Hill/IrwinBank Management and Financial Services, 6/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Characteristics of Target Firm to Consider
The Bank’s History, Ownership and Management
The Condition of Its Balance Sheet
The Bank’s Track Record of Growth and Operating Performance
The Condition of Income Statement
The Condition and Prospects of the Local Economy
Competitive Structure of the Market Area
McGraw-Hill/IrwinBank Management and Financial Services, 6/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Other Characteristics of the Target Firm to Examine
The Comparative Management Styles of the Merging OrganizationsThe Principal Customers the Targeted Bank ServesCurrent Personnel and Employee BenefitsCompatibility of Accounting and Management Information Systems of the Merging OrganizationsCondition of the Bank’s Physical AssetsOwnership and Earnings Dilution Before and After the Proposed Merger
McGraw-Hill/IrwinBank Management and Financial Services, 6/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Purchase of Assets Method of Purchasing Another Bank
A Method of Carrying Out a Merger in Which the Buying Company Purchases All of the Assets of the Acquired Firm
McGraw-Hill/IrwinBank Management and Financial Services, 6/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Purchase of Stock Method of Purchasing Another Bank
A Method of Consummating a Merger in Which the Acquired Firm Exchanges its Equity Shares for the Stock of the Acquirer
McGraw-Hill/IrwinBank Management and Financial Services, 6/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Merger Act
First Major U.S. Law to Bring Merging Banks Under Federal Supervision, Requiring Government Approval to Merge with or Acquire Other Banks
McGraw-Hill/IrwinBank Management and Financial Services, 6/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Under the Bank Merger Act
Merger Must Be Approved By Principal RegulatorNational Banks – Comptroller of the CurrencyState Member Banks – Federal ReserveState Insured Banks – FDIC
Regulatory Agency Must Give Top Priority to Competitive EffectsMergers with Anti-Competitive Effects May Be Approved if it Can Be Shown That There Are Significant Public Benefits Such As Providing Convenient Services or Rescuing a Failing Bank
McGraw-Hill/IrwinBank Management and Financial Services, 6/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Herfindahl-Hirschman Index
Measure of Market Concentration
It is the Sum of the Squared Market Share for All Banks in a Specific Market Area
Department of Justice GuidelinesPostmerger HHI of Less Than 1800
Change in HHI of Less Than 200
McGraw-Hill/IrwinBank Management and Financial Services, 6/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Factors that Get In the Way of Merger Success
Poor or Ill-Prepared Management
Mismatch of Corporate Styles or Cultures
Excessive Prices Paid for Mergers
Failure to Take Into Account Customers’ Feelings and Concerns
Lack of Strategic Fit
McGraw-Hill/IrwinBank Management and Financial Services, 6/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Keys to Merger Success
Acquirer Must Start By Evaluating Its Own Financial ConditionMust Have Detailed Analysis of Possible New MarketsMust Establish a Realistic Price for Target FirmAfterwards Combined Team Must Direct Progress Towards ConsolidationMust Establish Communication Between Senior Management and All EmployeesMust Create Communication Channels to Promote Understanding of Why Merger Took Place and Likely Consequences of MergerShould Create Customer Advisory Panels to Evaluate and Comment on Merged Bank’s Image and Products