Academic journal article Journal of Money, Credit & Banking

Why Do Banks Merge?

Academic journal article Journal of Money, Credit & Banking

Why Do Banks Merge?

Article excerpt

THE FINANCIAL INDUSTRY is consolidating at an accelerating pace: the integration of financial markets has blurred distinctions between activities such as lending, investment banking, asset management, and insurance. Firms have reacted to the sharper competition by cutting costs and expanding in size, often by merging with competitors or taking them over. Long isolated by protective regulations, banks are among the most active players. Technological innovations and a thorough-going deregulation have prompted a wave of mergers in the banking industry throughout the world, starting in the United States in the eighties and reaching Europe in the nineties.

At each announcement of a new deal, its benefits in terms of cost reduction and growth opportunities are emphasized by all parties. Curiously, however, the literature has failed to find convincing empirical evidence of these advantages and thus it questions the usefulness of mergers and acquisitions (M&As) (for a review of the main results in the field, see Rhoades 1994 and Berger, Demsetz, and Strahan 1999).

In this paper we deepen the analysis of the efficiency motives for M&As in two directions. First, we distinguish between mergers (that is, deals that involve the full integration of bidder and target banks) and acquisitions (transactions in which one bank purchases a controlling stake in another bank without joining the assets of the two) because they may well have different motivations and lead to different results. This separation enables us to gather useful insights into each type of deal that would not emerge when the data are pooled.

Second, we compare the motivations for mergers and acquisitions as they appear in an ex ante analysis of the characteristics of the banks with the ex post consequences for their performance. Previous research focuses mainly on the ex post effects, controlling for some broad categories of the firms such as size and profitability. In this paper we identify the banks most likely to take part in a merger or acquisition and relate systematically their characteristics to the subsequent performance of the deal: a deeper understanding of the determinants of M&As allows us to recognize the variables that lead to changes in the main economic and financial indicators usually considered in merger studies. Furthermore, we separate transitory from permanent effects when we test the hypothesis that mergers and acquisitions are followed by differential improvements in performance, as a result of cost reductions, revenue increases, or changes in the financial structure.

Most of the studies on bank M&As refer to the United States; few look outside the United States and almost none deals with European markets, if we except Vennet (1996) and Cybo-Ottone and Murgia (2000). In this paper we analyze all the mergers and acquisitions among Italian banks over the period 1985-1996. This is the first comprehensive exploration of this market, which constitutes a significant share of European financial markets and provides a benchmark for a good number of countries (France, Germany, and the continental European countries in general) that share the same characteristics, such as a bank-oriented financial system and rigid labor markets that might impede thorough restructuring. The Italian banking system is analogous to those in the main continental European countries in many dimensions, from its mix of large and small banks to common trends such as a gradual shift from the traditional intermediation business to a more services-oriented industry. In terms of regulation, in the period analyzed in this study, the Italian banking industry operated within a universal banking framework, as did its main competitors. Some peculiar Italian regulations, such as limits on branching and on the growth of the loan portfolio, were lifted at the beginning of the period we consider. …

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