The impact of Mergers and Acquisitions (M&A) on financial institutions
Οι επιπτώσεις των Συγχωνεύσεων και των Εξαγορών (Σ&Ε) στα χρηματοπιστωτικά ιδρύματα
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Keywords
Εξαγορές ; Συγχωνεύσεις ; Χρηματοπιστωτικά ιδρύματαAbstract
The European financial sector has experienced significant changes over the last two decades, mostly posing challenges on the operations of financial institutions rather than being the source of opportunities.
Key factors driving these upheavals included the failures or near-failures of UK and Continental European banks, which were heavily exposed to U.S. mortgage-backed securities that triggered the 2007-2008 Global Financial Crisis (GFC). The crisis was compounded by a liquidity shortage, as many of European banks relied on short-term funding from the U.S. dollar market, which dried-up as U.S. banks curtailed cross-border lending. In addition, interbank lending collapsed as European banks became increasingly wary of lending to each other, leading to a severe credit crunch with sharply restricted lending to businesses and households. The credit crunch was further exacerbated by the 2010-2012 sovereign debt crisis, and a sharp rise in non-performing loans, as the financial and sovereign crises escalated into a severe economic downturn across Europe (Bremus and Fratzscher (2015); Bhimjee et al. (2016); Iwanicz-Drozdowska et al. (2016)).
Following the outbreak of the European credit crisis, and amid widespread accusations that financial institutions had largely caused it, the European Central Bank (ECB) implemented a new supervisory framework. The ECB, as the main supervisory authority, aimed to enhance the resilience of banking institutions by initially assuming oversight of systemically important institutions from National Supervisory Authorities (NSAs). Through the newly established Single Supervisory Mechanism (SSM), the ECB imposed uniform regulations to reduce the heterogeneity that existed between the different national supervisory authorities, which were much stricter than before (Fiordelisi et al. (2017); Abad et al. (2020); Avgeri et al. (2021)). As a result, banks under direct supervision bore the additional burdens introduced by these regulatory changes.
A prominent factor attributed to the GFC and the subsequent credit crunch in Europe—or, at the very least, one that left financial institutions vulnerable—was weak corporate governance, especially within the board of directors (Kirkpatrick 2009; Francis et al. (2012); de Haan and Vlahu (2016); Fernandes et al. (2018)). In response, supervisory authorities around the world began to monitor more closely the governance structures of the institutions in their jurisdiction. They also reassessed the effectiveness of these governance structures, issuing revised corporate governance guidelines (e. g., the Walker Report (2009) in the UK; the European Commission Green paper (2010); the Federal Reserve Board (2013); and various Basel Committee on Banking Supervision guidelines (2006), (2008), (2010), (2015)). As a result, financial institutions faced the challenge of rethinking and reshaping their governance structures and practices where they were deemed inadequate.
Another factor driving profound changes in the financial sector was the rapid development of technology, and in particular the financial technology (Fintech). The start-ups that pioneered these technologies disrupted the previously dominant traditional financial institutions by offering similar services in a more user friendly, faster and direct way, while at the same time maintaining smaller and more flexible business structures. Consequently, traditional institutions, already dealing with other significant challenges, now faced the dilemma of adapting to these technological changes or risk gradually losing their competitive edge.
One section of traditional financial institutions that was particularly affected by the crisis was their investments in Mergers and Acquisitions (M&A). With profitability and liquidity at significantly low levels, these institutions lacked surplus needed to proceed with such expansions. Also, the stricter supervisory rules imposed by the Single Supervisory Mechanism, which enforced stricter criteria for realizing potential M&A transactions, further limited these activities. However, even smaller in number, M&A deals still occurred during this period, albeit mainly involving smaller domestic deals or forced acquisitions of failing institutions.
Despite the strict stance towards M&As, supervisors began to see that such agreements could lead to further improvement of the financial system by enabling more efficient institutions to absorb those that were superfluous to the industry and by enhancing the performance of systemic banks. Given this potential, it is therefore important to explore whether M&As could serve as an effective strategy to help European financial institutions address, or even transform, the challenges by the events mentioned above into opportunities. To this end, this thesis is presented in three essays. The first essay examines the relationship between M&As, capital levels and banks' financial performance. The second essay explores the relationship between M&As, the quality of governance, and the financial performance of banks. The third essay investigates the relationship between M&As or any cooperation with fintech companies, market power and the financial performance of banks.
Specifically, the first essay investigates the impact of M&A transactions on capital levels and, either directly or indirectly through the merger induced change in capital levels, on the profitability, and value of European banks by also considering the effects that any changes in capitalization may have first on their systematic risk (as they become safer) and then on their cost of capital (if they are deemed safer it is expected to decrease). Using reputable econometric methods and alternate measures for the examined variables, we offer new empirical evidence using a more recent sample of European banks from 14 countries (namely Belgium, Germany, Ireland, Greece, Spain, France, Italy, Cyprus, Lithuania, Malta, Netherlands, Austria, Portugal, Finland) for the period 2008-2020. In addition, we contribute to the existing literature by exploring how M&As affect significant measures of banks that were influenced by the advent of the Single Supervisory Mechanism which to our knowledge has not yet been examined in literature. Our analysis also considers the impact of SSM’s introduction on all tested measures by also taking into consideration the separation that it imposed to significant and less significant institutions.
Another innovation of this study is the more comprehensive investigation of the impact of M&As on European banks through a multilevel and sequential analysis which is not evident to our knowledge in the relevant literature. Specifically, we perform our analysis in two steps which are interconnected, and the merger effect of the first step is examined on the second one in order to capture the indirect long-term effect that may be created.
To conduct our econometric analysis, we employ the Generalized Method of Moments (GMM), specifically the two-step system GMM estimator approach, proposed by Arellano and Bover (1995) and Blundell and Bond (1998), to address any potential endogeneity issues that may arise in dynamic panel data models. The results primarily show that M&As have a significant impact on both the capital levels and profitability of banks. In particular, we find that institutions that attempt M&A deals experience an increase in their capital levels, both for the whole sample and specifically for directly supervised institutions. While there is also an increase in their accounting profitability, a decrease in market capitalization is observed for the whole sample, though the reverse is true for directly supervised institutions. However, when we examine the effects of multiple annual M&As and prior accumulated experience on such deals, saturation effects appear. The impact of M&As becomes insignificant or, in some cases, reversed, especially for directly supervised institutions.
Furthermore, the analysis of the indirect relationship between M&As and financial performance through increased capital ratios yields negative results. These results suggest that although the priorities of financial institutions in Europe have changed, with capital increases now motivating M&As, this focus on capital adequacy may constrain their ability to generate profits from core activities (such as issuing loans). In other words, while increasing capital can make institutions more secure, it may also limit their profit-making potential.
The second essay investigates the impact of M&As, first, on the quality of governance, and then either directly or through changes in the quality of governance induced by the merger, on banks' financial performance. Using robust econometric methods, as along with alternative measures of governance and bank performance, we offer new empirical results using a more current sample of European banks from 21 countries (namely Belgium, Germany, Ireland, Greece, Spain, France, Italy, Cyprus, Netherlands, Austria, Portugal, Finland, UK, Switzerland, Sweeden, Poland, Denmark, Hungary, Czech Rep., Norway, Russia) for the period 2008-2020. By employing a more comprehensive corporate governance indicator, combined with a multi-level and sequential examination, we provide a more thorough analysis of the impact of M&As. As in the previous essay, we use the two-step system GMM estimator approach for our econometric estimations.
The findings clearly demonstrate that M&As have a significant impact. Specifically, we observe a significant and positive effect of the M&As on the corporate governance of the acquiring banks. However, this effect seems to diminish significantly, potentially due to saturation, when M&As are not used strategically. Regarding the direct effect of M&As on banks' financial performance, both book profitability and market capitalization initially show positive results, but again, previous experience with M&As appears to lead to a saturation effect, diminishing the impact.
Regarding the indirect effect through change in the quality of governance, the results are more complex, leaning more towards the negative, as any positive impact on governance seems to bring more negative effects. While improved governance structures are generally seen as enhancing firm value, they do not seem to be positively perceived by investors. This could be explained by the possibility that investors do not prioritize governance structures, or if they do, the criteria for what constitutes "good" governance may not be clear or well-defined. As a result, increases in financial performance appear to be driven more directly by the M&A transactions themselves, rather than through improvements in governance structures, which may take time to translate into financial benefits.
The third essay examines the impact of M&As or any other kind of cooperation a bank may have with a fintech company, initially on the bank's market power, and then either directly or through the merger induced effects, on its financial performance. The aim of this essay is to offer new insights to the relatively scarce literature on partnerships between banks and fintech companies. In particular, this is the first to my knowledge study to investigate the impact of these partnerships on banks' market power, and through a multi-level and sequential analysis to provide a more comprehensive understanding of their overall impact, along with a possible pathway to achieving them. Our sample includes data from European banks from 21 countries (namely Belgium, Germany, Ireland, Greece, Spain, France, Italy, Cyprus, Netherlands, Austria, Portugal, Finland, UK, Switzerland, Sweeden, Poland, Denmark, Hungary, Czech Rep., Norway, Russia) for the period 2008-2020. As in the previous essays we use the two-step system GMM estimator to estimate the coefficients of our main models.
The results initially show a negative impact of M&As on banks' market power. However, when we test for multiple collaborations in a single year and examine the effects of prior experience with such deals, we find a clear positive result when multiple deals occur in one year. Conversely, when there are a large number of previous accumulated deals, the result turns again negative. The positive effect on market power appears to stem from long-term improvements such as increased efficiency and reduced labor costs, which can emerge from these partnerships.
The direct effect on performance, appears to be more complex. While there is an initially positive effect, this turns negative as the number of yearly deals and prior experience with similar collaborations increase. Combined with the indirect effect associated with the positive relationship with market power and the results of the previous steps, these findings indicate either that achieving synergies through such partnerships is a complex process. Thay may also indicate that while synergies may not materialize immediately, they can be realized over time through the organizational changes brought about by these partnerships.
These results imply that collaborations with fintechs are challenging and involve significant integration hurdles. To achieve beneficial results from such deals, the incumbent banks need to invest appropriate time and effort into transitioning to more efficient and agile business structures, at least like those of fintechs which seem to be key to realizing the sought-after synergies.
Department
Σχολή Οικονομικών, Επιχειρηματικών και Διεθνών Σπουδών. Τμήμα Οικονομικής ΕπιστήμηςNumber of pages
164Language
EnglishCollections
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Αναφορά Δημιουργού-Μη Εμπορική Χρήση-Όχι Παράγωγα Έργα 3.0 Ελλάδα
Αναφορά Δημιουργού-Μη Εμπορική Χρήση-Όχι Παράγωγα Έργα 3.0 Ελλάδα