Transcript AN EXAMINATION OF BANK MERGER ACTIVITY: A STRATEGIC FRAMEWORK CONTENT ANALYSIS • Cheryl Frohlich, University of North Florida – [email protected] • C.

AN EXAMINATION OF BANK
MERGER ACTIVITY:
A STRATEGIC FRAMEWORK
CONTENT ANALYSIS
• Cheryl Frohlich, University of North Florida
– [email protected]
• C. Bruce Kavan, University of North Florida
– [email protected]
Agenda for the Day
AN EXAMINATION OF BANK MERGER ACTIVITY:
A STRATEGIC FRAMEWORK CONTENT ANALYSIS
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1960-1979
1980-1989
1980-1989
1990-1998
Purpose of Study
Perceived Motivation Drivers
Stewart’s Motivating Forces
Stewart’s Merger Motivation
Theory of Increasing Financial
Performance
Cost Savings
Financial Performance
Performance Due to IBBF Act
and Geographic Diversification
IBBF Act and Geographic
Diversification
Consolidated Debt Capacity
•TBTF
•Methodology
•Fishbone Analysis
•Coders and Referee
•Tabulations
•Results-Four Main Paths
•Cost Reduction
•Increasing Gross Revenue
•Increasing Gross Revenue
Geographic Expansion
•Increasing Gross Revenue
Larger Asset Base
•Increasing Gross Revenue
Market Power
•Support For Stewart Merger Motivations
•Where Do We Go From Here?
AN EXAMINATION OF
BANK MERGER ACTIVITY:
• Over the last decade, bank mergers
and acquisitions have been
occurring at an unprecedented rate.
1960-1979
• 1960-1979
170 mergers per year
– Prior to 1980’s Prohibition against interstate
banking and state-level restrictions on branch
banking and multiple bank ownership
– DIDMCA (1980) and Garn St. Germaine (1982)
1980-1989
• 1980-1989
498 mergers per year
• In 1980’s mergers and acquisitions were
means for banks to penetrate new markets.
1990-1998
• 1990-1998 514 mergers per year
• The Riegle-Neal Interstate Banking and Branching (IBBF)
Act of 1994 allowed bank holding companies to acquire
banks in any state after September 29, 1995 and allowed
mergers between banks located in different states after
June 1, 1997.
• After Riegggle-Neale Act, banks have the full freedom to
acquire another out-of-state bank in order to expand
geographically across state lines and to diversify
geographically and by product.
Purpose of Study
• Determine the underlying and
driving forces and/or causations of
bank mergers
Perceived Motivation Drivers
• The acquiring banks' desire to increase its
return by expanding geographically.
• This perception is similar to Stewart’s
premises of merger motivation.
Stewart’s Motivating Forces
• The actual motivating forces behind mergers
– (1) increase financial performance (net operating
profits)
– (2) financial benefits through borrowing against the
seller’s unused debt capacity or against an increase in
the consolidated debt capacity (lending capacity for
banks)
– (3) tax benefits derived from expensing the stepped-up
basis of assets acquired or from the use of otherwise
forfeited tax deductions or credits.
Stewart’s Merger Motivation
Theory of Increasing Financial
Performance
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Largely accepted as being a merger
motivator within the banking industry
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Increases in net operating profits
result from:
cost savings
and/or
increase in revenue (financial performance)
Cost Savings
• Downsizing (Craig, 1997)
• Technological efficiencies (Investor’s
Chronicle, 1997)
Financial Performance
• Research---conflicting conclusions
on combined banks
– Financial performance-Not Improving
• (Baradwaj, Dubofsky, and Fraser, 1992; Palia, 1993;
Hawawine & Swary, 1990; Toyne & Tripp, 1998; Madura
and Wiant, 1994)
– Financial performance-Improving
• (Cornett & De, 1991; Chong, 1991; Cornett and Tehranian,
1992; Subrahmannyam, Rangan, & Rosenstein, 1997).
Performance Due to
Geographic Diversification
• Increase the bank’s market share
• Decrease risk
• Increase long-term profits
IBBF Act and Geographic Diversification
• Prior to the Riegle-Neal Interstate Banking
and Branching (IBBF) Act of 1994
• Banks were not allowed to expand
across state line (with some
exceptions).
IBBF Act and Geographic Diversification
• After Riegle-Neale Act
– Diversify geographically across the nation
• Result
– Unassisted merger rate has increased
Consolidated Debt Capacity
• As the banks merge and their capital base enlarges
– Combined lending ability increases
– Ability to offer larger loans without another bank
partner increases
• Net Results
– Increase in market share and revenue
– Decrease in competition.
TBTF
• Continental Illinois National Bank and Trust
Company in May 1984 was taken over by the
FDIC.
• The subsequent resolution by its regulatory
bodies, resulted in the government policy of
“Too Big to Fail”(TBTF).
TBTF (Continued)
Federal Deposit Insurance Corporation
Act of 1991
• the “TBTF” motivation should have decreased
in importance
• some researchers still found that the “TBTF”
was an important motivator in the larger
mergers of the 1990’s (Benston, Hunter, and
Wall, 1995; Hunter and Wall, 1989; Boyd and
Graham, 1991).
Methodology
• A content analysis was performed utilizing the
FDIC Applications for Merger/ Acquisitions for
1996 and 1997.
• Unit of analysis consisted of each independent
merger/acquisition application.
• Sample-- FDIC provided a random sample of the
merger/acquisition applications from 1996 and
1997.
Methodology (Continued)
• The coding scheme adopted for this content
analysis was conceptualized in the Porter
strategic model (Porter, 1980) as
operationalized in a “fishbone” analysis
framework (Nolan, Norton & Company,
1986).
Fishbone Analysis
• The coding scheme adopted
– Benefits:
ease
high reliability
– Disadvantages:
may be more limited over surveys in
terms of content validity to the extent that
the applications closely reflect the
underlying stated merger decision
rationale
Coders and Referee
• Multiple coders and a referee insure a high degree
of reliability in coding effort.
• For each application, two coders independently
coded each paragraph
• Results entered into a spreadsheet for data
management purposes.
• Results of the two coders were then compared,
and, if there were any disagreement, the referee
discussed the differences with each of the coders
and made a final determination.
Tabulations
• For each application:
– a resultant tabulation was created for stated and
implied merger rationale within the merger
application
– tabulations were overlaid on the fishbone for
visual inspection
Figure 1 - Strategic Fishbone
(Bold Type indicates significance)
Increase Net Revenue
Increase Gross Revenue
Increase Existing
Product Volume
Increase Margin
Introduce
Franchising
Increase Price
New Product Joint Acquisition
Venture
Add Value
Decrease cost
Increase Increase Demand
Merge Acquire
New
Market
Current
Eliminate
Industry
Share
Sales
Government
Reduce
Industry
Competition
Financing
Compliance
New
Supply
Compliment
Segment
Info
Compliment
Product
Overhead
Differentiate Increase
Product
Market
Territory
Substitute
Decision
Product
Need
Substitute
New
ManagementLines
Geographic
Support
Product
Decrease
Communications
Increase
Demographic Invent
Price
Invent
Present Use
New Uses Distribution
Channel
New Uses
Impair
Perceived
Promotion
Length
Competition
Price
Storage
Scheduling
Product
Increase
Increased
Potential
Purchasing
Feature/Function Perceived
Scale
Existing
entry/exit Product
Need Increase
Power
Cost
Increase Human Economics
barriers
Price
Companion
Buyout
Engineering
Productivity
Products Use
Real
Pre-emptive
Perceived
Improve
Competition
Feature/Function
Strike
Feature/Function
Process
Market
Reduce
Distribution
Increase
Power
Style
Waste
Speed
Increase
Channels
Product
Supplier
Packaging
Reduce
Increase
Brand
Quality
Sizes
Power
Locations
Waste
Speed
Vertical
Scale Promotion
Warranties
Increase
Inventory
Economics
Buyer
Horizontal
Quality
Options Transport
Quality
Adapted from Nolan,
Power Volumes Learning
Features
Norton & Company
Curves
Results-Four Main Paths
These four paths are related to
– (1) creating economies of scales
– (2) expanding geographically
– (3) increasing the combined capital base
(size) and product offering
– (4) gaining market power.
Cost Reduction
• Cost Reduction Rationales appear at a
Higher level in Porter’s “fishbone”
framework than increasing gross revenue.
– Stated Cost reduction rationale:
• Combined institution would create economies of
scales.
• Utilizing the synergies between the merging
partners would create cost reducing operating
efficiencies.
Increasing Gross Revenue
• The remaining three paths are related to
increasing gross revenue but at a much
lower level on the fishbone framework.
Increasing Gross Revenue
Geographic Expansion
•
decrease total risk
•
increase product sales
•
increase overall gross revenue.
Increasing Gross Revenue
Larger Asset Base
• Make loans to companies that the individual
institutions could not have previously
serviced due to capital base lending
regulatory restrictions.
• Offer a greater product array increasing
their sales and, thereby, increasing gross
revenue.
Increasing Gross Revenue
Market Power
• Better able to compete with institutions
within their market
• Increasing their product sales
• Increase gross revenue
Support For Stewart Merger
Motivations
Content analysis supports Stewart’s first two
motivation theories:
(1) Mergers increase financial performance
(net operating profits)
(2) Mergers produce financial benefits through
increasing the consolidated debt capacity
(lending capacity for banks)
Where Do We Go From Here?
• Categorical Discriminate Analysis
• Possible Problems--- With the number of
observations per cell on the fishbone