Determinants of Mergers and Acquisitions Success in Banking Industry.
[Dissertation (University of Nottingham only)]
This paper is designed to investigate why previous researches fail to detect the synergies and benefits of combination, what are the determinants of M&A success in banking industry, and to what extent can these determinants influence the post-merger performance. Multiple regression analysis is performed on a data sample of 39 M&A cases in banking industry over 2001-2009 to estimate the relationship between explanatory variables and the dependent variable.
The results indicate that, mergers tend to generate more benefits for combination of two banks rather than a bank and a nonbank financial service provider, such as insurance companies or real estate firms. For one year post-merger period, geographic focus of a transaction does not have a significant impact on the outcome of combination. Scale economy may not be shortly realized or reflected on the shareholder values, while cross-border deals can be profitable by obtaining lower labour cost or exploiting demand from market abroad. The combination is generally more successful if the target entity enjoyed a high and promising pre-merger growth rate. In addition, no significant relationship between relative size and merger gains has been observed. To acquire a target relatively small, the process of integration is less complicated, and the target is easier to understand, monitor and control, which consequently lead to a huge saving in transition cost. To acquire a target of similar size, redundancy is easier to identify, monopolistic power will be enhanced to a larger extent after the combination. As a result, if managers are able to adopt proper strategies according to different sizes, advantages of either case can be fulfilled. However, managers may undertake acquisitions for their private interest, such as positioning acquisition and defensive acquisition. Furthermore, the results show that a relative profitable bidder does not necessarily guarantee a high stock market return, as the relative ratio can be misleading due to mathematical reasons. It is more likely for a target with a high profit ratio to achieve merger efficiency. As for an underperformed target, bidder has to devote more time and money, such as the additional wage costs to replace the poor management team in the target entity. Finally, the advantage of cash dominant transaction is evident. Financial strength is proved to be a solid support for a profitable merger, which also effectively raises market confidence of investors.
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