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Analysing Mergers and Acquisitions in European Financial Services:An Application of Real Options
http://liveweb.livjm.ac.uk/AFE/AFE_docs/cibef0502.pdf Dunis and Klein (2005) considered an acquisition as an option of potential benefits. Hence, assuming semi-efficient capital markets, the market capitalisation reflects the market participant s view on the value of those benefits once the merger is announced. In this case, the share price, equivalent to the option, is the cumulated market value of both companies without the merger. They applied the real option pricing theory model to a sample of 15 European bank mergers announced between 1995 and 2000 to examine if these were possibly overpaid. The results showed that the option premium exceeded the actual takeover premium suggesting that, those acquisitions were not on average overpaid.

2. Banking performance in domestic and cross-border acquisitions
http://.brain.net.pk/articles/Mergers%20And%20Acquisitions%20Current%20Issues.pdf#page=2 13 Diaz, Olalla and Azofra (2004) examined the bank performance derived from both the acquisition of another bank and acquisition of non-banking financial entities in the European Union. The sample consisted of 1,629 banks, where 181 acquisitions were noted over the period 1993-2000. They found that the acquirer obtains some efficiency gain in bank mergers. They also found some evidence on the impact of takeover on the acquirer when acquiring non-bank firms and when the sample was split by type of acquirer (i.e. commercial banks, savings banks, cooperative banks). In particular their results revealed that the acquisition of financial entities by European banks can increase their profitability. However, a lag of at least two years between the acquisition and the increase in performance was observed. The acquisition of other banks had an effect on acquirers ROA as was revealed by the increase in the long-term profitability.

3. Inter-Country Differences in a Merger and Acquisition Announcement
http://pure.au.dk/portal/files/8188/Thesis.pdf Beitel and Schiereck (2001) examined the value implications of 98 large M&As of publicly traded European banks that occurred between 1985 and 2000. They found that for the entire sample the shareholders of targets earned significant positive cumulated abnormal returns in all intervals studied, while the shareholders of the bidding banks did not earn significant cumulated abnormal returns. From a combined view of the target and the bidder, European bank M&As were found to significantly create value on a net basis. The study of Beitel, Schiereck and Wahrengoug (2002) builds on and extends the study of Beitel and Schiereck (2001) by examining the same data set but with a different objective. They analysed the impact of 13 factors that include relative size, profitability, stock efficiency, market-to-book ratio, prior target stock performance, stock correlation, M&A-experience of bidders and the method of payment on M&A-success of European bank mergers and acquisitions, in an attempt to identify those factors that lead to abnormal returns to target shareholders, bidders shareholders, and the combined

After the acquisition of the Union Bank by Standard Chartered bank. that further lead towards increment in equity. while the relative degree of profit efficiency improved only marginally. The research resulted with unavailability of before merger and after merger financial statements. A year later in mid of 2008. suggesting that the merging banks were unable to exercise greater market power 5. The recent trend of mergers and .eur. Bank settled effectively cemented position as the largest and fasted growing international bank in Pakistan. After merger Standard chartered bank achieved awards. Today there are 176 branches across 41 cities. (2001) examined the performance effects of European banks M&As using a sample of 52 bank mergers over the period 1994-1998. During this year the Bank announced its acquisition of Union Bank that was the eighth largest banks in Pakistan with US$2 billion in assets. The main intention behind this study is to analyze the post merger performance of the Standard Chartered bank.pdf The first branch of Standard Chartered had been opened in Karachi in 1863. 4. POST MERGER PERFORMANCE ANALYSIS OF STANDARD CHARTERED BANK PAKISTAN http://journal-archieves24. The Union bank was acquired by Standard chartered bank in December 2006.000 customers. From banking system review it was also seen that merger of banks is adapted to increases the return on capital.pdf Huizinga et al. the bank had 176 branches across 41 cities. No study conducted on this bank ever before. Comparing merging Banks exhibited a lower degree of profit efficiency than average. they found that deposit rates tended to increase following a merger. Effets of Merger and Acquisition in European Banks http://repub.entity of the bidder and the target around the announcement date of M&A.nl/res/pub/6843/2001-0883. 2006 was the beginning year for the transformations of Standard Charterer’s operations in Pakistan. In 2007 the merged bank had 115 branches across 22 cities in Pakistan.webs. The main objective was to study and review the existing system of merger and by accessing the gap was to suggest some measures to meet the gap. many foreign banks reached to Pakistan and acquired other small and medium sized banks or financial institutions to expand their network and business in Pakistani market. Results showed that many of these factors have significant explanatory power. Before merger Union Bank was the eighth largest bank in Pakistan. and about 400. The acquisition was for US$ 487 million in December 2006. Finally. The dynamic merger analysis indicated that the cost efficiency of merging banks was positively affected by the merger. leading the authors to the conclusion that the stock market reaction to M&A-announcements can be at least partly forecasted. Revealed results provided evidence of substantial unexploited scale economies and large X-inefficiencies in European banking.com/164-173. just focused on merger effect with limited applicability of ratios. while small merging banks exhibited a higher level of profit efficiency than their peer group.

return on capital employed (ROCE) and net interest margin (NIM) separately. Deposits and macro factors i. 2009). deposits.eu/portals/0/arhiva/gul%20et%20al%20-%20je%2039. 1997).e. Total Assets. inflation and stock market capitalization are perceived to have more safety and such an advantage can be translated into higher profitability. Whereas. economic growth. better management and therefore efficiency enhancement (Gjirja. return on asset (ROA). input savings. Privatization of public sector banks and the ongoing process of merger/consolidation brought visible changes in the ownership. The purpose of this research is to examine the relationship between bank-specific and macroeconomic characteristics over bank profitability by using data of top fifteen Pakistani commercial banks over the period 2005-2009. Banks attained the performance improvement after merger on the basis of decrease in cost of production and increase in production level. This paper uses the pooled Ordinary Least Square (POLS) method to investigate the impact of assets. equity. On another side it was seen that horizontal mergers mostly cause the efficiency. return on equity (ROE). In this case all talents of superior management are spread over there with the help of different resources. Thus efficient business gets required results.e. inflation and market capitalization on major profitability indicators i. The mergers selected were generally large horizontal mergers that are thought to be the kind of merger most likely to yield efficiency gains (Rhoades. The Pakistani banking system since it has a completely diversified banking structure presents an interesting case. The empirical results have found strong evidence that both internal and external factors have a strong influence on the profitability. 2006). Most of the places it was seen that merger is mostly used to reduce the cost and proper management which will ultimately lead to wards efficiency. Individual bank characteristics (internal and external factors) are considered as determinants of bank profitability in Pakistan.e.. Scope of economies or changes in product mix are another potential way in which mergers might help improve bank performance (Berger & Humphrey. Hypothesis 1 states that microeconomic factors have significant impact on profitability. This study investigates the impact of bank-specific characteristics and macroeconomic indicators on bank’s profitability in the Pakistan’s banks for the 2005-2009 periods. loans. For this purpose. two hypotheses have been developed for analyzing bank’s profitability over specific determinants i. A quick look at net income before tax over total assets of all banks (operating throughout the time period under study) yield very low profitability levels (Ramlall.2009). 6.acquisitions of local banks by the foreign banks is also intended to extend their outreach to maximize return on their capital (Malik. economic growth.. Merger and acquisition is adopted to attain the operating and financial efficiencies. 1994). Factors Affecting Bank Profitability in Pakistan: http://rejournal. 2003). and concentration in the banking sector (State Bank of Pakistan. structure. Another source of cost efficiency behind merger was that efficient banks acquires the inefficient banks and run their managing rules over the inefficient. hypothesis 2 states that external factors of the banks have significant .. Mergers between entities are often motivated with arguments on cost reduction. Loans. The results of the study are of value to both academics and policy makers.pdf The financial system of Pakistan is dominated by the commercial banks. Banks with more equity capital.

de/37311/1/MPRA_paper_37311. This paper investigates the differential effects of cross-border mergers & acquisitions (M&As) and greenfield investment on income distribution within the host country. The result shows that both hypotheses have accepted and have a significant impact on profitability of the Bank’s in Pakistan. while greenfield investment exhibits a significantly positive effect on income disparity. This paper contributes to the existing literature by distinguishing and comparing the effects of different types of multinational activities on income distribution within the host country. FDI is considered as a conduit of transferring physical capital and intangible assets. we find that greenfield investment in Latin America and Caribbean region decreases income inequality.uni-muenchen. However. Therefore. 8. polices are necessary to alleviate the exacerbation of income inequality when receiving greenfield investment. The remainder of the paper proceeds as follows. However. There has been a concern that the inflows of FDI may affect the income distribution within the host country. Effect of Mergers and Acquisitions on Market Concentration and Interest Spread: http://mpra. Section V concludes. Section II lays out the econometric model. Traditionally.pdf Since the surge in foreign direct investment (FDI) across the world in the 1980s. Section III discusses the data and section IV presents the analysis of empirical results. Although the theoretical studies have not reached a consensus. The production of MNCs in host countries involves two forms: M&As and greenfield investment. our results show that M&As have an insignificant impact on income inequality. such as technology. skills and human capital development.edu/orgs/ijae/index_files/iIJAE%20MARCH%20HONG%20Z HUANG%202013%205-6-2013.pdf . The Effect of Mergers & Acquisitions and Greenfield FDI on Income Inequality: http://www2. Using a sample of 93 countries from 1990 to 2009. 2007).southeastern.ub. host countries often favor greenfield investment as it creates jobs and adds to local employment. though most of the empirical and theoretical literature has not distinguished between them (Nocke and Yeaple.impact on the profitability. 7. the purpose of this paper is to investigate whether these two forms of FDI have differential effects on income inequality. Our findings suggest a policy implication to policymakers in terms of evaluating the cost of greenfield investment. we find that greenfield investment is positively associated with income inequality while M&As present an insignificant effect. Using a sample of 93 countries from 1990-2009. Furthermore. The two modes of FDI may exhibit different economic consequences. The greater mobility of factors of production stimulated by the presence of multinational corporations (MNCs) affects the income distribution within the host country and therefore generates interests in studying the effect of FDI on income inequality. in contrast to the positive effect of average greenfield investment. most of the empirical results imply a deleterious effect of FDI on income equality. it is a caution to host countries‟ government that the production of MNCs in the form of greenfield investment is associated greater income disparity.

Findings show that the profitability and net interest spread of two merged banks declines as a result of mergers. capital sufficiency. It means that it is the right time for banking industry of Pakistan to be reviewed by any antitrust authority to maintain the optimum level of competition.Difference between banks’ earning on assets and interest paid on deposits is termed as interest spread. 1000. The particular characteristics of commercial banks that are typically considered to have an effect on their spreads include the size of the bank. It was calculated as: Interest Spread = Return on average assets . and net interest spread are computed which are considered essential to judge the financial performance of any bank. This difference in approach requires that SBP should not review . ownership pattern. Market Concentration is calculated by using Herfindahl-Hirschman Index or HHI. overhead costs. However. This study assessed the relationship of M&A and industry concentration with the interest spread.cost of average funds Return on average assets = Total interest income earned over average assets Average assets = Average loans and advances + Liquid. Findings disclosed that the industry concentration shows a rising trend as a result of merger. which have occurred in its domestic economies. 2007) Market Concentration: Market Concentration is calculated by using Herfindahl-Hirschman Index or HHI (Khawaja and Musleh. which has been on a growing trend in the last few years. interest earning investments Average cost of funds = Total interest paid by the bank over all borrowed funds i. Interest Spread: Interest Spread is measured as the difference between the average interest rate earned on loans and paid on deposits (Tennant. Concentration of the banking industry increases during 2008 and 2009 after mergers occurred during 2007. net interest spread of the merged banks shown a declining trend in these years which means that concentration do not lead to high interest spread. it shows the level that almost approaches the threshold i. 2007). Mostly.e. Market concentration is number of firms and their respective shares in a market. Pakistan needs a competition policy in the wake of the merger movement as well as because of privatization. There are so many factors. One or two more mergers can push up threshold level of HH index. It is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. which influences the net interest spread. It is also revealed that Concentration of the banking industry shows a rising trend during 2008 and 2009 after mergers occurred during 2007 as a result of merger. 2007). deregulation. public want to maximize their return and they call for a high degree of competition which suits their intentions. the quality of the loan portfolio. To assess whether the merger of Pakistani banks were a success or otherwise. liquidity ratios. This study investigates the relationship of mergers & acquisitions with the interest spread of the banking industry in Pakistan. regulators interest inclined towards greater market concentration in order to maintain a smooth and stable banking system. However. operating expenses. However. profitability.e. market share and shares of current and fixed assets. Deposits plus Borrowings (Khawaja and Musleh. and liberalization.

while the more significant effects were related to bank consolidation. First._2_No.153. We note that governance changes bring about an improvement in banks’ TFP vis-à-vis that of banks that did not undergo governance changes. If these trends continue.pdf During the last two decades. The declining trend in TFP growth could be an indication of the increasing profitability of the banking sector. for entering new markets and geographies. we estimate a stochastic cost frontier model using unbalanced panel data on commercial banks for the period 1991–2005. but it does have a wider appeal. Rather. prudential regulations that authorized (i) the opening of several new private and foreign banks. using the estimated frontier. Second. and .52. which could be a consequence of the banking industry’s increased profitability.179/JOURNAL/LJE%2016%20se/12%20Abid_Burki%20Shabbir_Ahmad%20 -%2017th%20Septem. for this purpose an Antitrust Authority/body must be introduced/ organized having sufficient powers to decline any merger proposal that they think will post considerable negative impacts on competition in Pakistan banking industry.pdf In today’s globalize economy. and the merger and acquisition of private and foreign banks. following ownership change. 9.com/journals/Vol._5_%5BSpecial_Issue_-_March_2011%5D/20.Post-Merger Profitability: A Case of Royal Bank of Scotland (RBS) http://www. we adopt an empirical framework that allows us to study the impact of all governance reform variables in the same model. The vast body of literature on banking efficiency and productivity provides insights into variables that have significantly affected banks’ performance in the past.the proposal from antitrust outlook. and that. this group of banks is expected to hold on to the gains in technical efficiency even in the long run. Empirical research on the impact of bank governance on bank performance remains limited. while bank consolidation seems to be more effective in improving TFPC. broadening the portfolio to reduce business risk. In general. these banks demonstrated improved technical efficiency. Pakistan’s banking sector has undergone structural changes as part of the phased reforms in the financial sector that were initiated in 1990/91. Finally. This study attempts to investigate the impact of changes in bank governance on bank performance in Pakistan. We also note that bank selection for governance changes has a mixed effect on TFPC. These reforms paid attention to. (ii) the restructuring and downsizing of state-owned banks before being privatized. The Impact of Merger and Acquisition on Bank Governance on Bank Performance in Pakistan: http://121. mergers and acquisitions (M&A) are being increasingly used the world over for improving competitiveness of companies through gaining greater market share. we decompose banks’ total factor productivity (TFP) change into its different components. Governance changes entail the privatization and restructuring of stateowned banks.ijbssnet. and (ii) reforms relating to mergers and acquisitions (M&A) that helped consolidate private and foreign banks. selection variables brought about partial effects by bank ownership. among other things. Our results have also shown that banks selected for M&A were technically less efficient than private banks. We have also found that most of the TFPC in Pakistan’s banking sector was driven by technical change. 10. We find a declining trend in TFP change (TFPC). Using the concept of frontier efficiency. the results show an improvement in banks’ cost efficiency following changes in bank governance.

increase market share and revenues. And analyzed their financial statements for four years (2006-2009) by using 20 vital ratios. The bank has to minimize the cost of capital in order to maximize the returns.ciitlahore. Akhavein et al (1997) finds that merged banks realized statistically significant increase in profit efficiency relatively to other banks. taxation. Another limitation is that it only talks about the diversification effect of banks mergers and acquisition it totally ignores the other corporate sectors of the economy. used accounting ratios to analyze the financial performance of Royal Bank of Scotland (RBS) in Pakistan after merger. In this study. Merged banks seems to have increased their efficiency in the years after the merger and it is true when the deal of merger of two banks operating on the same local markets and when the size of the new bank is not so big. 11. synergy. . In spite of certain limitations. liquidity. leverage. It means that merger deal fails to improve the financial performance of the bank. The results show that the financial performance of RBS in the areas of profitability. Customer Service Officer of RBS does not give the full information about the bank’s merger. and these improvements are high for the banks that are inefficient prior to merger.pk/11-1003%20mushtaq%20ur%20rehman.pdf Jalal D. There are certain suggestions for this research study are RBS has to follow same policies and incentive plans that central bank have to maintain in order to boost up the profits in Pakistan’s banking sector. geographical and other diversification.capitalizing on economies of scale etc. Ratio analysis. This article also measure the extra efficiency derived from the comparison with a benchmark. The motives behind mergers and acquisitions are economy of scale. Due to these reasons banks merged with one another or targeted by acquiring bank. This bank has to use same reporting standards like IFRS and IAS. being a time-tested technique.edu. The data before 2006 is not available on internet and stock exchange (KSE) which are the utmost sources of information regarding financial data. The main limitation of this research study is the non availability of financial data before 2006. There must be an impact of possible differences in accounting methods adopted by these foreign banks. and cash flows has been quite satisfactory before the merger deal. is most frequently employed in all financial decision-making processes. economy of scope. Cornett et al (2006) finds that after merger revenue enhancement and cost reduction improved performance of banks and these results are more significant for large banks relatively to small ones. assets management. According to Crispi et al (2004) pre merge efficiency of merged and acquired bank is relatively low. Although this study explain the efficiency effects of banks mergers and acquisition but it did not cover the other effects of mergers and acquisition in banking sector like cognizable efficiencies effect which are related to specific mergers in banking sector. accounting ratios are still considered as a convenient and reliable analytical tool.Do bank mergers lead to efficiency gains? The Case Study of bank mergers in Pakistan (working paper) http://saicon2011.

Michaelet al (2001) most of the estimated value gains from bank mergers stem from the opportunity to cut cost by eliminating overlapping operations and consolidating backroom operations. the cost efficiency of bank mergers is substantial while profit efficiency is marginal. According to GARY A. 12. Ratios of peer group were used as control variable. According to Len.php site article download 2 2 Several studies discussed. tested and proposed empirical validations on mergers and acquisitions (M&A) in last many decades. DYMSKI (2002) U.P. Data for pre merger and post merger activity were analyzed. and acquiring bank achieves moderate improvements in scale efficiency. Results of studies showed that on average mergers reduced cost but not necessarily brought efficiency gains. In developing countries such mergers are not efficiency driven but actually due to changes in macro structural changes and due to change in banking strategies over time. (2001) checked the efficiency effect of 52 horizontal bank mergers in Europe. According to Huizinga.S experience that mergers are efficiency driven is unique and can’t be applicable on all banking industry.efficiency 2 to 4 years. While banks with same set up cant explore new business grounds so can’t achieve cost efficiencies from merger. Ping-wen (2005) that banks relating to different cultures can achieve better results from merger regarding cost efficiency in Taiwan. For a typical bank merger estimated revenues enhancement are significantly less important.org index. were applied on nine case studies on USA banking industry. He finds that economies of scale or cutting costs are difficult to implement in country where labor laws are rigid. He also finds that profitability and operating cost performance of surviving banks after merger are greatly influenced by balance sheet attributes and other bank characteristics. (1998) used case study methodology in order to find out the cost and efficiency results of merger. These researches have tested the economic impact of M&A through their pre and post-performance analysis. According to Ryngaert D.Facarelli Dario et al (2002) finds that strategic objective of merger is expanding revenues from financial services. Sixteen financial ratios consisted on expense ratios. H. Rhoades Stephen A. Effects of merger and acquisition on the performance of selected Commercial Banks in Nigeria thejournalofbusiness. to check the observed changes are due to economic variables or due to combined firm effect. profitability ratios. and balance sheet ratios. According to Peristiani Stavros (1997) banks that participate in a merger realized a small but significant decline in pro forma X. shareholders and company their . on industry. Moreover size of acquiring firm and premerger efficiency of acquiring firm can’t predict the results of merger.

They select the sample of all the mergers between public limited ad trading firms during 1991-2003. For this purpose Malaysian commercial banks were taken to analyze the technical efficiencies during the merger year. Rhoades (1993) studied the impact of mergers in banking industry on efficiency and profitability considering both the domestic and cross border mergers. . It is concluded in the study that M&A in the Egyptian banking sector’s profitability showed a significant improvement and a small positive impact on the credit risk position. Badreldin & Kalhoefer. And these proposals have positive impact on short-term and long-term both. Although the financial sector especially banks took advantage and got benefits from mergers but some of the large banks faced certain inefficiencies of large scale from this. larger business. They also concludes that merger program was successful and the small size Malaysian banks. diversification and reduction in cost etc. competitive advantage. Their analysis suggested an increase in the performance when companies are compared with the pre-merger performance.selves.9%. they also proposed different methods for analyzing and attaining the success from mergers. tables and different ratios to make analysis of correlation etc. But these observations are not similar to the current process. and study pre and post-merger period. Kumar & Bansal. This study used financial data. The findings of this study did not show much impact in the post-merger operating performance of the firms in different industries in India. and found that in most of the cases the company who acquire other through M&A got so many benefits and generate synergy in long run like increase in cash flow. Moreover. (2009) research is based on Egyptian banks which have faced Merger or acquisition during the era of 2002-2007. (2008) explored the impact of M&A on corporate performance in India. It discussed the cost and profit efficiency analysis of 33 bank-to-bank mergers which shows that the most of the domestic mergers improves the cost efficiency and little improvement of profit efficiency whereas little improvement in the profit efficiency and no improvement in the cost of efficiency in the cross border mergers Sufian (2004) focused on the efficiency effects of M&A of banks in Malaysia. Mantravadi & Reddy (2008) studied pre and post-merger performance in India and target the acquiring firms from diverse sectors and different industries but their major emphasis was on measurement of operating performance of the firms through financial ratios. They calculated companies Return on Equity (RoE) in order to the level of progress and success of banking reforms in strengthening and consolidating this sector. Their results proved an overall increase in efficiency in the sample period which is around 95. They investigate that whether all the claims which are made about the mergers are achieved in India or not.

liquidity. profitability and earning. Results shown that the financial performance of RBS in the areas of profitability. and cash flows have been quite satisfactory before the merger deal. Researcher used accounting ratios to analyze the financial performance of Royal Bank of Scotland (RBS) after merger. leverage. (2010) investigated the effects of mergers on the financial performance of Atlas Investment and Al-Faysal Investment Bank Ltd from Pakistan. capital adequacy and solvency. Study analyzed financial statements for four years (2006-2009) by using 20 vital ratios. Merger increase the financial performance due to improved attention to business. It is concluded that in post-merger period of sample both the banks improved their financial performance. Study employed three financial measures. Authors commented that M&A is a good strategy to increase the performance of the bank. improved management. and easy access to the new and expensive technology. It found that for Faysal bank limited average improvement is recorded in the post-merger period.Obaid-ullah. It means that merger fails to improve the financial performance of the bank . better credit assessment. assets management. Kemal (2011) discussed post-merger profitability for Royal Bank of Scotland. Sabeeh-ullah & Usman.