The Valuation Effect of US Bank Mergers over the Financial Crisis Period

//The Valuation Effect of US Bank Mergers over the Financial Crisis Period
The Valuation Effect of US Bank Mergers over the Financial Crisis Period2016-11-10T15:00:25+00:00

According to Jensen (1993), the increased merger activity is related to the deregulation in the industry. Many other researchers have also found out the same results that mergers are induced by deregulations. When the trend in the banking industry has been examined, deregulation has become the main reason for the mergers in the banking industry. For instance, comparison done between 1980 and 1990 concluded that bank mergers increased to almost 215% from 1980 to 1990 (Jensen, 1993). However, in the public sector, merger activity increased to an extent that it doubled the figure for mergers. The merger rate in early years of 1980 was almost 5% only in the public banking sector, but the rate increased to 15%, that is almost double in the first few months of 1990.
From the deregulation proposition, researchers have tried to find out the different theories that are involved in the merger process. Banking industry is immune to the different theories of the mergers. These theories are the synergy theory and the hubris theory. If mergers are for building synergies, then the mergers are said to be beneficial to the firm. Moreover, mergers bring synergy in a firm’s earnings and this helps to increase the shareholder’s value. While if the mergers are of hubris type, then these would not be beneficial for the shareholders’ value. As such, hubris mergers lead towards agency conflict between the managers and the shareholders (Weston et al., 1998).
Neoclassical researchers, for example Gort (1969), developed different rational for the merger waves to occur. According to the neoclassical view, the main reason for the acquisition or merger is the economical disturbance. This economical disturbance would lead towards the reorganization of the industry and due to this economic change; the firms in an industry opt for mergers. Thus, the good rational for the merger activity, according to the neoclassical view, is the economic change in the industry. However, Coase (1937) explained that mergers could result from technological change within an environment
The debating Scenario to Bank Mergers
The motives of bank mergers decide the success and failure of mergers. A strategic motive that does not ignore its corporate mission, goals, objectives, status and strengths and weakness always result in success of M&A activities. When an M&A motive is strategic and has a value creation logic, bank mergers results in success (Seth et al. 2000). The degree and type of diversification e.g. conglomerate, concentric, related and unrelated diversification, decides the level of success (Hayward, 2002; Palich et al., 2000). For the banking industry, the selection criterion of merger and acquisition partner is very critical success factor. Similarly, price, strategic fit, management, culture, size, organizational structure and control system have an important influence on success and failure of mergers and acquisitions (Angwin, 2004). The technological performance of an M&A also decides the level of technological performance. When more technological resources are available, firms are better positioned to create value, thus their innovation and technological performance improves (Valentini & Dawson, 2010). On the other hand, Berger and Humphrey (2010) stated that the efficiency of a bank does not have a significant relationship with mergers and acquisitions.
A model of mergers and acquisitions was given by Stahl and Sitkin (2010) while discussing the antecedents and consequences of role of trust played in mergers and acquisitions activities. According to this model, perception of acquirer’s manager’s trustworthiness is very critical and it has an influence of past relationships. Basically, the level of trust and ambivalence are key factors affecting success and failure of M&As. Therefore, the banking industry of U.S. considers trust as the most critical factor for making a decision regarding mergers and acquisitions.
Additionally, merger and acquisition activities set the future growth level of organizations. Mostly, the expectations regarding performance are not fulfilled. Because of psychological biasness, the actual performance is not up to the expected level. By resolving problems in psychological biasness through particular model presented by Garbuio et al (2010), the causes of failure can be explored in any organization, thus success can be ensured. Through this, expectations of growth can also be fulfilled.
Berger and Bouwman (2009) discussed the scenarios for the banks to go for mergers and acquisitions and found out that strong banks have good opportunity in terms of acquiring other smaller banks. The banks which are financially sound and are healthy from the point of view of the liquidity and the capital would have the opportunity to acquire the bank and diversify their portfolio. Through this way, banks can increase their market share and the profitability when there are crises in the economy. These stronger banks have the benefit to achieve and gain the assets of the other smaller bank at the discounted price. This is so because smaller banks cannot afford the crisis situation, and want other banks to attain it. It would, therefore, agree on the lower price to sell its assets. Acharya et al. (2011) have explained that stronger banks have the benefit of reserving high concentration of liquid assets in the normal time period. These liquid assets are to be used in the crises situations to acquire assets of the other small banks. In essence, the smaller banks would be willing to sell their assets because in the crises situation, they would be unable to meet their current liabilities. The result is, therefore, selling their assets at a discounted price. The stronger bank has the advantage of getting access of the assets of the smaller bank at the discounted price, thus benefitting from the crises situations. The acquisition of the more liquid asset is one of the characteristic features for the banks to acquire the other business during the years of crises.