Chapter Nineteen Acquisitions and Mergers in Financial Services Management

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Motives Behind the Rapid Growth in Bank Mergers

• Profit Potential • Risk Reduction • Rescue of Failing Banks • Tax and Market Positioning Motives • Cost-Savings or Efficiency Motive • Mergers as a Device for Reducing • Mergers as a Device for Maximizing Competition • Management’s Welfare • Other Motives

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Merger Motives Identified By Bank Executives

• Quality of Management • Profitability (Return on Assets) • Efficiency of Operations • Maintenance of Market Share

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Most Important Goal of Any Merger

The Most Important Goal of Any Merger Should Be to Increase the Market Value of the Surviving Firm.

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Impact on Earnings Per Share

Generally Speaking Shareholders of Both the Acquired and Acquiring Firm Will Gain If: 1. Bank with Higher P/E Ratio Acquires Bank with Lower P/E Ratio And If: 2. Combined Earnings Do Not Fall After the Merger

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Merger Premium

A Merger Premium is Paid if the Acquiring Bank’s Shareholders Receive More Than the Current Market Price for Their Stock

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Exchange Ratio

The Number of Shares of Stock Offered By an Acquiring Bank for Each Share of Stock of the Acquired Bank

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Dilution of Ownership

Dilution of Ownership Occurs When the Acquiring Bank Offers an Excessive Number of Shares to the Acquired Bank Shareholders. The EPS Will Fall Below its Original Level for the Acquiring Bank When This Happens.

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Characteristics of Target Firm to Consider

• The Bank’s History, Ownership and Management • The Condition of Its Balance Sheet • The Firm’s Track Record of Growth and Operating Performance • The Condition of Income Statement • The Condition and Prospects of the Local Economy • Competitive Structure of the Market Area

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Other Characteristics of the Target Firm to Examine

• The Comparative Management Styles of the Merging Organizations • The Principal Customers the Targeted Bank Serves • Current Personnel and Employee Benefits • Compatibility of Accounting and Management Information Systems of the Merging Organizations • Condition of the Bank’s Physical Assets • Ownership and Earnings Dilution Before and After the Proposed Merger

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Purchase of Assets Method of Purchasing Another Bank

A Method of Carrying Out a Merger in Which the Buying Company Purchases All of the Assets of the Acquired Firm Using Either Cash or its Own Stock

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Purchase of Stock Method of Purchasing Another Bank

A Method of Consummating a Merger in Which the Acquired Firm Exchanges its Equity Shares for the Stock of the Acquirer

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Bank Merger Act

First Major U.S. Law to Bring Merging Banks Under Federal Supervision, Requiring Government Approval to Merge with or Acquire Other Banks

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Under the Bank Merger Act

• Merger Must Be Approved By Principal Regulator – National Banks – Comptroller of the Currency – State Member Banks – Federal Reserve – State Insured Banks – FDIC • Regulatory Agency Must Give Top Priority to Competitive Effects • Mergers with Anti-Competitive Effects May Be Approved if it Can Be Shown That There Are Significant Public Benefits Such As Providing Convenient Services or Rescuing a Failing Bank

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Herfindahl-Hirschman Index

• Measure of Market Concentration • It is the Sum of the Squared Market Share for All Banks in a Specific Market Area • Department of Justice Guidelines – Postmerger HHI of Less Than 1800 – Change in HHI of Less Than 200

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Keys to Merger Success

• Acquirer Must Start By Evaluating Its Own Financial Condition • Must Have Detailed Analysis of Possible New Markets • Must Establish a Realistic Price for Target Firm • Afterwards Combined Team Must Direct Progress Towards Consolidation • Must Establish Communication Between Senior Management and All Employees • Must Create Communication Channels for Customers and Employees to Understand Why Merger Took Place • Should Create Customer Advisory Panels to Evaluate and Comment on Merged Bank’s Image and Products

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