IMPACT OF MERGERS

& ACQUISITION ON
BANKING INDUSTRY
EVALUATING IMPACT ON PROFTABILITY,
FINANCIAL STRENGTH, BUSINESS
KENDING & SHAREHOLDERS WEALTH
 CONTENTS
CONTENTS.....................................................................................................................................2

.........................................................................................................................................................3

INTRODUCTION...........................................................................................................................4

PREVIOUS RESEARCH................................................................................................................4

PROPOSED METHOD...................................................................................................................6

Research Question 1: Profitability and Mergers & Acquisitions .........................................6

Research Question 2: Mergers And Financial Strength .............................................................7

Research Question 3: Effect of Mergers & Acquisitions on Small Business Lending...............8

Research Question 4: Impact of Mergers & Acquisitions on Shareholders wealth...................8

Data Collection............................................................................................................................8

Sample Size & Data Analysis......................................................................................................9

REFLECTION ................................................................................................................................9

CONCLUSION .............................................................................................................................10

RESEARCH TIMELINE...............................................................................................................11

REFERENCES..............................................................................................................................12

APPENDIX....................................................................................................................................15

CONTENTS.....................................................................................................................................2

.........................................................................................................................................................3

INTRODUCTION...........................................................................................................................4

PREVIOUS RESEARCH................................................................................................................4

PROPOSED METHOD...................................................................................................................6

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 Research Question 1: Profitability and Mergers & Acquisitions .........................................6

Research Question 2: Mergers And Financial Strength .............................................................7

Research Question 3: Effect of Mergers & Acquisitions on Small Business Lending...............8

Research Question 4: Impact of Mergers & Acquisitions on Shareholders wealth...................8

Data Collection............................................................................................................................8

Sample Size & Data Analysis......................................................................................................9

REFLECTION ................................................................................................................................9

CONCLUSION .............................................................................................................................10

RESEARCH TIMELINE...............................................................................................................11

REFERENCES..............................................................................................................................12

APPENDIX....................................................................................................................................15

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INTRODUCTION
Banks and financial institutions are linchpin of any economy. This research mainly focuses on
the evaluation impact of merger on the profitability, financial strength, business lending and
shareholders wealth of a financial institution. There has been a considerable research on the
overall evaluation of mergers and acquisitions on a firm, but this research in context of financial
institutions and banks is very limited. After recent financial turmoil, consolidation is that
strongest force that has shaped the financial services industry. Analysts believe that from 2000 to
2010, one of the big bulge bracket bank has grown its assets from more than fourfold i.e. from
$0.639 trillion to US $2.19 trillion, almost double the size of Indian GDP. It was mainly due to
the technological innovations in the eighties and deregulation the financial services that
prompted a wave of mergers, which eventually reached Europe in the nineties (Beitel, 2006).
Financial crisis of 2008 has a profound effect on the financial performance of the banks and it
was due to his reason that banks were doing whatever they can do in order to survive on of the
deepest financial crisis of the history (Linder, 1991). Most financial institutions strive to gain
from the synergies arising from the merger, these synergies can be in terms of increased
efficient, economies of scale, cost savings, sharing risks and benefiting from technological
sharing which all are the common motivations behind a merger (Ramaswamy, 1997). Another
motivation that can be attributed to a successful merger was stricter regulation from the
European and American authorities in terms of capital structure and minimum capital
requirements that most financial institutions had to merge in order to the meet the capital
requirements (Amaro, 2001). It will however also be beneficial to extend the research and study
impact of mergers and acquisitions on the lending of the banks. All these factors discussed above
will make the research even more interesting and an area yet unexplored.

PREVIOUS RESEARCH
Mergers in the banking sector are an unexplored area for research. While a rich literature exists
on generic mergers in the international context, very few studies are conducted in particularly in
the banking industry (Vives, 2000). In the post reform period, there has been a sharp increase in
the merger activity across the globe. Berger (1996) analysed 36 mergers (1992-1995) using
operating cash flow returns and do not found any increase in profitability. Cabral (2002)

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analysed the motives of merger. In addition, he found no value addition due to merger. Cybo-
Ottone and Murgia (2007) identified the characteristics of merging firms based on 227 acquirer
and 215 targets. Gande (2008) examined both domestic as well as foreign deals, and found that
they are associated with positive announcement results and in long term is worse than pre-merger
performance. Focarelli (2007) analysed the critical issues of consolidation in the western banking
sector from the point view of shareholders and managers. They found that in forced merger, both
bidders and targets share price has been reduced. In case of voluntary merger results are mixed.
Pilloff and Santomero (2008) have studied the impact of merger announcement merger
announcements on shareholders wealth. They took 5 private sector bank mergers globally and
found positive gain for both bidders and target (Chatterjee, 1992). This report will make an
attempt to analyse the implications of a merger on the overall financial performance of the banks
and will specifically take into consideration the case of 16 different banks.

Following research questions will be tried to prove:

Research Question 1: There is direct relationship between the mergers and acquisition on the
profitability of financial institution.
Research Question 2: There is a significant impact of the mergers and acquisition upon the
financial strength.
Research Question 3: There is significant impact of mergers and acquisition on the lending
behaviour of the banks.
Research Question 4: Mergers and acquisition have significant effect on shareholders wealth.

Cornett (2003), asserts that current regulatory and technological advancements will be not
sufficient in disassemble the residual blockade for the assimilation of global retail banking
markets. Gual (2005) argues that process of integration is remote from entire retail banking
because of the existence of strategic (brand, branch network and reputation) and natural (distance
and language) barriers as an exception to the tenet of regulations of the home country (Zajac,
1989). The Middle East and North Africa commonly known as MENA, is located strategically
right in the middle of Asia and Western economies which were mostly colonised by the French
or the British on the mid of the past century (Datta, 1992). Major financial institutions and the
banks were formed according to the western principles, whose basic tenets were recently

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challenged by the current financial crisis. Banks, which were based in the MENA region, came
up with a unique idea of Islamic Finance which differs from the traditional banking (Shleifer,
2004). In the former banks were only providers of credit to the companies, finance government
deficits and public investment projects.

PROPOSED METHOD
The main aim of this research will be focussed on analysing the impact of merger on the
financial performance of selected financial institutions since the financial turmoil. It is very
important to analyse the background information and the latest trends in the context of mergers
and acquisition (Deng, 2005). Increase in the general level of economic integration has always
been one of the motives of cross border merger and acquisitions of the financial institutions.
Globalisation and recent augmented international has created demand for the international
financial services (Hughes, 2003).

Research Question 1: Profitability and Mergers & Acquisitions

An underlying motive behind most mergers and acquisition is to seek synergies which are the
enhanced economic value created by the resulting merger. Another perceived benefit of merger
and acquisition is market penetration, market entry, vertical integration to control supply and
demand and economies of scale (Houston, 2001). This question mainly mains at analysing
impact of merger on the profitability and financial strength (DeYoung, 2003). The research will
mainly entail both qualitative and quantitative analysis. Profitability, of a financial institution is
mainly expressed in terms of financial ratios. These ratios must be carefully chosen, the main
criteria.
Pre- Post- Chan Relative
Total Mean Merger Merger ge Change
Profitability
Return On Equity
Return On Assets
Gross Profit Margin
Economic Value Added
(EVA)
Return On Capital
Earnings Per Share
Asset Turnover
Return per Employee

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 Table 1: Comparison of Profitability Pre and Post Merger Ratios (Mean)
As shown in the Table 1 above shows the financial parameters of profitability and financial
strength. These parameters are carefully selected in order to embrace a holistic approach to the
research (Akhibe, 2003).
PREMERGEREQUITYRATIO- ROEGRAPH POSTMERGEREQUITYRATIO- ROEGRAPH
O

O
R

R
E

EquityRatio (%) EquityRatio (%)

Research Question 2: Mergers And Financial Strength

Evidentially, the value of mergers and acquisitions in the Middle East rose by 42% in 2012
compared to the previous year. The net investment banking fees rose by 19% in 2012 reaching a
total of $536.1 million. The U.S. financial after the financial crisis has burnt midnight oil to
reform the whole banking sector with a radically new regulatory regime.
Pre- Post- Chan Relative
Total Mean Merger Merger ge Change
Financial Strength
Current Ratio
Debt To Equity Ratio
Debt To Assets Ratio
Cash Flow Ratio
Net Gearing
Debt Ratio
Capital Adequacy Ratio

Dodd Frank Act and Volker Rule were then framed to put a control to the irregularities in the
financial services industry. Similar developments were observed not only throughout the world
including United Kingdom, Middle East and Asia. Non depository industry has also shown an

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uptrend throughout the globe in 2007-2010, these mergers however are driven mainly by
domestic demand in a specific geographical location.

Research Question 3: Effect of Mergers & Acquisitions on Small Business Lending

It is often observed after merger banks and financial institutions are reluctant to lend money to
small businesses. This is not because of risky nature of small businesses but due to organisational
diseconomies arising due to the merger (Vander Vennet, 2002). Large banks face a trade off
between their other business units including transaction based loans, derivatives etc.

Research Question 4: Impact of Mergers & Acquisitions on Shareholders wealth

Mergers and acquisitions have a significant impact on the shareholders wealth, allowing them to
earn positive abnormal returns (Winton, 2004). Answering this question would mainly cover
analysis of past research papers on mergers & acquisitions and the data around the
announcement date of the merger and key ratios will be calculated. Further following ratios will
be discussed in detail:
Pre- Post- Chan Relative
Total Mean Merger Merger ge Change
Investment Ratio
Earnings per Share
P/E Ratio
Dividend Yield
Price/Book Value
Ratio
Dividend Payout
Ratio
Return On
Shareholders Fund

Data for this analysis will mainly be taken from Thomson Reuters and Bloomberg Terminals.
SPSS will be used for data analysis and conclude results.

Data Collection
Primary data will be collected from surveys, online questionnaires, academic research papers and
journals of the subject. Secondary data will be collected mainly from the online sources i.e.
companys annual report, market research report and market opinions (i.e. Financial Times, BBC
and Bloomberg).

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Sample Size & Data Analysis
A sample size of 20 banks will be considered for the purpose of this research. The banks chosen
for the analysis are carefully chosen and sample size contains banks from the U.S., Europe and
Middle East. The financial data will be mainly accessed from the annual reports of the
organisations (Rajan, 2001). In order to gain better understanding position of each bank is plotted
against Equity-Ratio and ROE will be examined for pre and post M&A (DeLong, 2001). The
purpose of analysing the Equity ratio and ROE is to predict the relation of profitability and
bankruptcy risk. For banks with ROE and equity ratio can be inferred as lower risk of bankruptcy
whilst having higher profitability. The whole data will be broken down in windows (-2,+2) as
follows:
Window (-2, +2): Evaluating performance and financial strength in the 2 year before the merger
and 1 year after the merger. The rationale behind assuming 2 years is to avoid any anomalous
behaviour of organisations (Morgan Stanley, 2003). ROE will be used as a dependent variable
and following graph will be plotted against Equity ratio.

REFLECTION
This study will be carried out on 16 different financial institutions that have merged in the past
10 years. These firms are mainly financial institutions listed on various stock exchanges
throughout the world. While these firms are listed on various stock exchanges and each have
their own tenets of divulging information (McKinsey, 2002). I, have however, tried to analyse
ratios and not financial numbers which I expect would give true and fair representation of the
results.

Another reflection of this research is the use of judgemental sampling and not considering the
probabilistic method of sampling which would have been a much fairer perspective. This
decision however can be defended with another limitation which is ease of availability of data.
There are indeed numerous financial institutions that have either merged or acquired other
financial institution but due to the nature of working and responsibility towards the shareholder,
not all organisations publicise their financial performance. The sample size considered for this
study is 20 which can be limited compared to vast number of mergers and acquisition in the past
10 years. Calculation of financial ratios and analysing these ratios from ones own perspective is

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yet another limitation that cannot be avoided. Of all the financial ratios, average of those ratios is
taken, one can also argue to consider mean instead, which is yet another constraint that must be
considered.

This research can be even more comprehensive if time is not a limitation. And, with respect of
conceptual and theoretical analysis length of time can be one of the hurdles that a researcher
might face. It cannot also be however excluded, to devote more time and rework on parts of the
research that needs more attention (Demsetz, 2006).

CONCLUSION
This research will enable to understand the long term implications of merger on a firms
financial performance. This research can also be extended to analyse whether mergers tend to
create or destroy the value of a financial institution and what impact it has on the consumers. If
mergers destroy the value then for how long this period remains and when it start creating value.
Profitability and financial strength will be mainly indicated through the financial ratios, and the
results of this research will prove whether mergers are a profitable or not for a financial
institution and does mergers with other financial institution helps in meeting capital adequacy
ratio according to Basel III norms.

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RESEARCH TIMELINE

TASK FEBRUARY MARCH APRIL MAY

WEEK 1 WEEK 2 WEEK 3 WEEK 4 WEEK 1 WEEK 2 WEEK 3 WEEK 4 WEEK 1 WEEK 2 WEEK 3 WEEK 4 WEEK 1 WEEK 2 WEEK 3 WEEK 4
MILESTONE 1
PROPOSAL SUBMISSION
LITERATURE REVIEW
DATA GATHERING
MILESTONE 2
STATISTICAL ANALYSIS (MAINLY
THOUGH EXCEL AND SPSS)

AMENDMENTS ACCORDING TO
SUPERVISOR'S REMARKS
ANALYSIS OF RESULTS
MILESTONE 3
WRITING UP DISSERTATION
CONCLUSION
PROOF READ
SUBMISSION OF FIRST DRAFT
FINAL EDITING
MILESTONE 4
DISSERTATION SUBMISSION

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Cornett, M. M., Hovakimian, G., Palia, D., & Tehranian, H. (2003). The impact of the manager-
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of Financial Economics, 59, 221252.

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APPENDIX
1.) List Of Banks To Be considered:

S.NO Acquirer Acquired Entity Name Of Merged Entity Year Of Merger

1 Capital One ING Direct USA Capital One 2011
2 JP Morgan Chase Washington Manual JP Morgan Chase 2008
3 Wells Fargo Wachovis Wells Fargo 2008
4 Bank Of America Meryll Lynch Bank Of America 2008
5 Bank Of New York Mellon Financial Bank Of New York 2008
6 Citigroup Golden State Bancorp Citigroup 2002
7 Abu Dhabi Commercial Bank Royal Bank of Scotland Abu Dhabi Commercial Bank 2010
8 Emirates Bank National Bank Of Dubai Emirates NBD 2007
9 Royal Bank of Scotland ABN AMRO Royal Bank of Scotland 2008
10 Barclays Plc Lehman Brothers Barclays 2008
11 HSBC Oman International Bank HSBC 2012
12 Lloyds TSB Halifax Halifax 2008
13 Malayan Bank Bank Internasional Indonesia Malayan Bank 2008
14 OCBC Great Eastern Holding OCBC 2006
15 UOB Bank Of Asia UOB 2005
16 Toronto Dominion Bank Banknorth NA TDBanknorth 2005

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