Academic journal article Journal of Money, Credit & Banking

Acquisition Targets and Motives in the Banking Industry

Academic journal article Journal of Money, Credit & Banking

Acquisition Targets and Motives in the Banking Industry

Article excerpt

OF THE ROUGHLY 7,600 commercial banking organizations in the United States in 1995, a substantial number had disappeared as independent entities by 2005. Bank failures were quite rare over that period, in contrast to the situation in the 1980s and early 1990s. Thus, the vast majority of the reduction since 1995 was due to acquisitions of banks rather than bank failures. The period since the mid 1990s is also unique in that it marks the first time that geographic restrictions on the operations of banking organizations were largely nonexistent. Many intrastate restrictions on bank operations had been relaxed by the beginning of the period, and easing of interstate restrictions soon followed. A particularly important development was passage of the Reigle-Neal Act of 1994, which was fully implemented by mid-1997.

This Act relaxed previous restrictions on interstate banking operations, allowing acquisitions and mergers across state lines on a nearly universal basis. Given the large number of mergers that took place in the late 1990s and early 2000s and the unique characteristics of the time period, this study employs a large sample of independent banking organizations, observed annually, to investigate the characteristics that influenced the likelihood of a bank being acquired during the period from 1996 to 2005. Since this is the first study that uses data recent enough to include a substantial number of interstate acquisitions, it is the first to investigate whether the determinants of interstate acquisitions differ meaningfully from the determinants of intrastate acquisitions. We also employ a subsample of publicly traded banking organizations to investigate the role of managerial ownership in explaining the likelihood of acquisition.

Following Wheelock and Wilson (2000), we use a competing-risk proportional hazard model to estimate the relationships between various bank and market characteristics and the "hazard" of being acquired. In our study, however, acquisition by differing types of acquirers, classified according to the location and size of the acquirer, define the competing risks. This approach provides a natural framework for investigating the determinants of out-of-state acquisitions, since acquisition by in-state and out-of-state acquirers can also be modeled as competing risks.

An additional advance concerns the definition of an acquisition. We employ the widely accepted, but seldom implemented, standard that an acquisition occurs when there is a change in control. The use of the "change-in-control" standard means that the case of a bank holding company (BHC) acquiring an independent commercial bank or another BHC is counted as an acquisition, even when newly acquired bank institutions are not merged into an existing banking subsidiary of the acquiring holding company. Also, mergers of two banks owned by the same BHC are not counted as acquisitions, since presumably no (or very little) change in control occurs in such transactions.

The plan of the paper is as follows. Section 1 discusses the relevant literature, while Section 2 lists and discusses the explanatory variables employed in the analysis. Section 3 presents the empirical model, while Section 4 discusses data sources and procedures. Section 5 presents econometric results, and a final section summarizes the findings of the analysis.


Although various past studies have investigated the characteristics of banking organizations that make them more likely to be takeover targets, none use a comprehensive sample of acquisitions defined as a change in control, and nearly all employ data for periods that precede the last 10 years.

Employing a sample of Texas banks in existence in 1970, Hannan and Rhoades (1987) report that banks that have larger market shares, maintain lower capital-to-asset ratios, and operate in urban areas were more likely to be acquired, all else equal. …

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