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 Sleptsov (2010), the performance of acquirer’s bank performance is dependent on two things. These are the type of partner and experience of acquirer. In this case, a bank has to choose between these two conflicting variables. As observed in case of investment banks, the less experienced acquirer has to rely on expertise of acquired bank. On the other hand, experienced acquirer gain an edge and enhance performance through their own capabilities to search, select and manage a good partner of merger and acquisition. Similarly, a less experienced acquirer relies on advisor’s help in merger and acquisition process.
An important debate related to bank mergers is about compensation of CEO of acquirer. Logically, the compensation of CEO should increase with managerial productivity level after merger and acquisition. But the compensation level depends on size of the firm so after mergers and acquisitions CEO’s pay is increased extensively. This can be the reason for low efficiency and managerial productivity of merged or acquired banks (Christopher et al, 2004).
Factors Influencing Bank Mergers
Effect of Mergers
Rhoades (2000) studied the effect of mergers on the United States’ banking sector. From the results of this study, it was found that mergers affect both the United States’ banks and the non-United States’ banks. Mergers beneficially affect the United States based banks as they are directly regulated by the government and they are influenced more significantly. And the impact of mergers is more evident in the United State base banks than the non-United State base banks. Valentini and Dawson (2010), in their study, found that mergers are more beneficial for the United State based banks and not up to that target for the non-United States based banks.
The banking sector of the United States has shown tremendous growth and expansion. Wheelock and Wilson (2000) found that banks have an impact when the mergers occur in the non-diversified institutional that are financial in nature. These mergers between these financial institutions that are none diversified affect the performance of the banks. When the performance of the bank is affected, the value of shareholders is also affected. The mergers have potential effect on the performance of the banks in different ways. More importantly, there are four ways that affect the performance of the banks. The first factor that has impact on the performance of the banking system during merger is the economies of scale. Rhoades (2000) stated that the performance of the banks would also be affected in case of mergers through the redeployment of different assets of the bank and through the transferring of different fixed assets to the other managers who can utilize these assets more efficiently. The last factor that affects the performance and share holders’ value is due to the implicit contract which is usually of labour contract and renegotiations would occur in the labour contracts that would lead towards change in the performance of the bank and the value for the shareholder.
Types of mergers
1. Conglomerate
It’s a merger between firms which are intricate in completely unconnected business ventures. These are also of two kinds. One is pure conglomerate mergers which comprise companies with unknown in communal, while the other kind is mixed conglomerate mergers that comprise companies that are beholding for produce extensions or else market additions (Wheelen & Hunger, 2001). A conglomerate merger usually clues, concluded by the diversification result, to abridged danger for the joint unit. As is fit recognized, in seamless capital markets these risks decrease cannot be helpful to shareholders. Meanwhile, they can attain on their personal the favoured grade of danger in their “homespun” assortments. In a study by Yakov (1981), a “managerial” reason for the conglomerate merger has been advanced as well as tested. Precisely, executives, as opposed to stockholders, are imagined to be involved in conglomerate unions to reduce their mainly undiversifiable “employ risk” (for instance, risk of mislaying job, expert status, among more others). These kinds of risk-reduction doings are measured as managerial privileges in the setting of agency cost ideal. This theory around conglomerate merger incentive is mathematically scrutinized in two dissimilar tests as well as bring into being as reliable with the statistics.