1、Chapter Nineteen Acquisitions and Mergers in Financial-Services ManagementKey Topics Merger Trends in the United States and Abroad Motives for Merger Selecting a Suitable Merger Partner U.S.and European Merger Rules Making a Merger Successful Research on Merger Motives and OutcomesIntroduction A glo
2、be wave of mergers involving banks,securities firms,insurance companies,and other financial-service providers has been under way Reflects the great forces of consolidation and convergence that are dramatically reshaping the financial-services industry This trend is driven byqIntense competitionqDere
3、gulationqThe search for the optimal size financial-services organization Mergers on the Rise Many of the mergers sweeping through the banking industry reflect lower legal barriers that previously prohibited or restricted expansion For example,in the U.S.,the Riegle-Neal Interstate Banking Act of 199
4、4 and the Gramm-Leach-Bliley(GLB)Act of 1999 The GLB law opened wide the arena for banknonbank financial-service combinations Permits banks,insurance companies,and security firms to acquire each other Critics of the GLB law argue that while GLB may result in reducing U.S.financial firms risk exposur
5、e,it does not appear to hold great promise for major improvements in operating efficiency Mergers on the Rise(continued)Competition among European financial firms is becoming more intense,leading to continuing mergers and acquisitions Financial-service mergers in Europe have slowed from time to time
6、 due to a slowing economy and European governments attempts to protect their home banks from acquisition by outsiders Asia and Japan also have experienced a growing number of mergers Due to an effort to shore up credit quality problems,fend off the ravages of deflation and sluggish economies,and com
7、pete with powerful U.S.and European banksTABLE 191 Recent Leading International Financial-Service Mergers and AcquisitionsTABLE 192 Some of the Largest Financial-Service Mergers and Acquisitions in American HistoryThe Motives Behind the Rapid Growth of Financial-Service Mergers Mergers usually occur
8、 because1.The stockholders involved expect to increase their wealth or reduce their risk exposure2.Management expects to gain higher salaries and employee benefits,greater job security,or greater prestige from managing a larger firm3.Both stockholders and management may reap benefits from a mergerTh
9、e Motives Behind the Rapid Growth of Financial-Service Mergers(continued)Profit Potential Some argue that the recent increase in financial-service mergers reflects the expectation of stockholders that profit potential will increase once a merger is completed If the acquiring organization has more sk
10、illful management than the firm it acquires,revenues and earnings may rise Especially true of interstate or international mergers where many new markets are entered If the acquiring firms management is better trained than the management of the acquired institution,the efficiency of the merged organi
11、zation may increase May result in more control over operating expensesThe Motives Behind the Rapid Growth of Financial-Service Mergers(continued)Risk Reduction Many merger partners anticipate reduced cash flow risk and reduced earnings risk The lower risk may arise because Mergers increase the overa
12、ll size and prestige of an organization Open up new markets with different economic characteristics from markets already served Make possible the offering of new services whose cash flows are different in timing from cash flows generated by existing services Mergers can result in a more stable finan
13、cial firm,able to withstand fluctuations in economic conditionsThe Motives Behind the Rapid Growth of Financial-Service Mergers(continued)Rescue of Failing Institutions The failure of a company is often a motive for merger Many bank mergers have been encouraged by the FDIC as a way to conserve feder
14、al deposit insurance reserves and avoid an interruption of customer service when a depository institution is about to fail The great credit crunch of 20072009 resulted in numerous financial firms either failing or in real trouble for which mergers and acquisitions were often the only optionThe Motiv
15、es Behind the Rapid Growth of Financial-Service Mergers(continued)Rescue of Failing Institutions The Motives Behind the Rapid Growth of Financial-Service Mergers(continued)Tax and Market-Positioning Motive Many mergers arise from expected tax benefits Especially where the acquired firm has earnings
16、losses that can be used to offset taxable profits of the acquirer There may also be market-positioning benefits A merger will permit the acquiring institution to acquire a base in a completely new market Examples of U.S.market-positioning acquisitions:Bank of America Corp.acquiring FleetBoston Finan
17、cial Corp.Wachovia Corp.acquiring Golden West Capital One Corp.acquiring North Fork Bancorp and Hibernia Corp.The Motives Behind the Rapid Growth of Financial-Service Mergers(continued)The Cost Savings or Efficiency Motive Large-scale staff reductions and savings from eliminating duplicate facilitie
18、s have followed in the wake of some of the largest mergers in the financial-services sector Research has shown that sometimes the single most important merger motivation was the desire to reduce operating costs followed by a plan to diversify into new markets Many mergers are of the market extension
19、 type Means that the merging institutions do not overlap much or at all in terms of geographic area servedThe Motives Behind the Rapid Growth of Financial-Service Mergers(continued)Mergers as a Device for Reducing Competition When two competitors are allowed to merge,the public is served by fewer ri
20、vals for their business Service quality may diminish and prices and profits may rise More aggressive prosecution of the antitrust laws may need to be consideredThe Motives Behind the Rapid Growth of Financial-Service Mergers(continued)Mergers as a Device for Maximizing Managements Welfare(An Agency
21、Problem)Management may view a prospective acquisition as a way to increase salaries and employee benefits,lower the risk of being fired,and enhance managers reputation in the labor market from working for a bigger firm If managers reap these benefits at the expense of company stockholders,an agency
22、problem emergesThe Motives Behind the Rapid Growth of Financial-Service Mergers(continued)Other Merger Motives Increased growth capacity Enables a lending institution to expand its loan limit to better accommodate large and growing corporate customers This is particularly important in markets where
23、the lenders principal business customers may be growing more rapidly than the lending institution itself Give smaller institutions access to capable new management and costly new electronic technologySelecting a Suitable Merger Partner How can management and the owners of a financial firm decide if
24、a proposed merger is good for the organization?Measure both the costs and benefits of a proposed merger(not easy to do)A merger is beneficial to the stockholders in the long run if it increases the stock price per share The price of a financial firms stock depends upon1.The expected stream of future
25、 dividends flowing to the stockholders2.The discount factor applied to the future stock dividend stream,based on the rate of return required by investments of comparable riskSelecting a Suitable Merger Partner(continued)In order to maximize stockholder value,the proposed merger should Improve Operat
26、ing Efficiency(reduce operating cost per unit of output)Consolidate operations and eliminate duplication Geographic Diversification Product Line Diversification Find an acquisition target whose earnings or cash flow are negatively correlated(or have a low positive correlation)with the acquiring orga
27、nizations cash flowsSelecting a Suitable Merger Partner(continued)A major consideration in any proposed merger is its probable impact on the earnings per share(EPS)of the surviving firm Stockholders of both acquiring and acquired institutions will experience a gain in earnings per share of stock if
28、both of the following occur A company with a higher price-to-earnings(P-E)ratio acquires a company with a lower P-E ratio Combined earnings do not fall after the merger In this instance,EPS will rise even if the acquired institutions stockholders are paid a reasonable premium for their shares Select
29、ing a Suitable Merger Partner(continued)As long as the acquiring institutions P-E ratio is larger than the acquired firms P-E ratio,there is room for paying the acquired companys shareholders a merger premium High-premium deals often yield disappointing results for the stockholders of the acquiring
30、firmSelecting a Suitable Merger Partner(continued)Exchange Ratio The number of shares of stock offered by an acquiring bank for each share of stock of the acquired bank Dilution of Ownership Spreading the firms ownership over more stockholders so that the average shareholders proportion of firm owne
31、rship declines Results from offering the acquired firms stockholders an excessive number of new shares relative to the value of their old shares Dilution of Earnings Spreading a fixed amount of earnings over more shares of stock so that the EPS of the combined firm declines Will occur if the P-E of
32、the firm to be acquired is greater than the P-E of the acquiring firmThe Merger and Acquisition Route to Growth The acquired firm(usually the smaller of the two)gives up its charter and adopts a new name(usually the name of the acquiring organization)The assets and liabilities of the acquired firm a
33、re added to those of the acquiring institution A merger normally occurs after managements of the acquiring and acquired organizations have struck a deal Proposed transaction must then be ratified by the board of directors of each organization and possibly by a vote of each firms common stockholders.
34、The Merger and Acquisition Route to Growth(continued)If the stockholders approve(usually by at least a two-thirds majority),the unit of government that issued the original charter of incorporation must be notified,along with any regulatory agencies that have supervisory authority over the institutio
35、ns involved In the U.S.,the federal banking agencies have 30 days to comment on the merger of two federally supervised banks There is a 30-day period for public comments as well Public notice that a merger application has been filed must appear in a newspaper of general circulation serving the commu
36、nities where the main offices of the banks involved are located The U.S.Justice Department can bring suit if it believes competition would be significantly reduced after the proposed mergerThe Merger and Acquisition Route to Growth(continued)The principal characteristics of the targeted institution
37、that are examined by the potential acquirer fall into six broad categories1.The firms history,ownership,and management2.The condition of its balance sheet3.The firms track record of growth and operating performance4.The condition of its income statement and cash flow5.The condition and prospects of
38、the local economy served by the targeted institution6.The competitive structure of the market in which the firm operates(as indicated by any barriers to entry,market shares,and degree of market concentration)The Merger and Acquisition Route to Growth(continued)In addition,potential acquirers will lo
39、ok at these factors as well1.The comparative management styles of the merging organizations2.The principal customers the targeted institution serves3.Current personnel and employee benefits4.Compatibility of accounting and management information systems among the merging companies5.Condition of the
40、targeted institutions physical assets6.Ownership and earnings dilution before and after the proposed mergerMethods of Consummating Merger Transactions Mergers usually take place employing one of two methods1.Pooling of interests2.Purchase accounting For mergers begun before July 1,2001,the Financial
41、 Accounting Standards Board(FASB)permitted use of the pooling of interests Merger partners merely sum the volume of their assets,liabilities,and equity in the amounts recorded just before their merger takes placeMethods of Consummating Merger Transactions(continued)In contrast,under purchase account
42、ing the firm to be acquired is valued at its purchase price and that price is added to the total assets of the acquirer The acquirer records the acquisition at the price paid but must value the acquired firm at market value plus goodwill(if the acquisition price and market value are different)No goo
43、dwill is figured in when using the pooling of interests approach After 2001,the pooling of interest method for merger accounting was eliminated for U.S.financial firmsMethods of Consummating Merger Transactions(continued)Another way to view the merger process is to determine exactly what the acquire
44、r is buying in the transaction Assets or shares of stock Purchase-of-assets method The acquiring institution buys all or a portion of the assets of the acquired institution,using either cash or its own stock The acquired institution usually distributes the cash or stock to its shareholders in the fo
45、rm of a liquidating dividend and the acquired organization is then dissolvedMethods of Consummating Merger Transactions(continued)Purchase-of-stock method The acquiring firm assumes all of the acquired firms assets and liabilities and the acquired firm ceases to exist While cash may be used to settl
46、e either type of merger transaction,in the case of commercial banks,regulations require that all but the smallest mergers and acquisitions be paid for by issuing additional stock of the acquirer A stock transaction has the advantage of not being subject to taxation until the stock is sold,while cash
47、 payments are usually subject to immediate taxationMethods of Consummating Merger Transactions(continued)The most frequent kind of merger among depository institutions involves wholesale banks merging with smaller retail banks Lets money center banks gain access to relatively low-cost,less interest-
48、sensitive consumer accounts and channel those deposited funds into profitable corporate loansRegulatory Rules for Bank Mergers in the United States Two sets of rules generally govern the mergers of banks and other financial firms:1.Decisions by courts of law2.Statutes enacted by legislators,reinforc
49、ed by regulations For example,the Sherman Antitrust Act of 1890 and the Clayton Act of 1914 forbid mergers that would result in monopolies or significantly lessen competition in any industry Whenever any such merger is proposed,it must be challenged in court by the U.S.Department of JusticeRegulator
50、y Rules for Bank Mergers in the United States(continued)The Bank Merger Act of 1960 Requires each merging bank to request approval from its principal federal regulatory agency before a merger can take place National Banks Comptroller of the Currency State Member Banks Federal Reserve State Insured B
