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ChapterNineteenAcquisitionsandMergersinFinancial-ServicesManagement
KeyTopicsMergerTrendsintheUnitedStatesandAbroadMotivesforMergerSelectingaSuitableMergerPartnerU.S.andEuropeanMergerRulesMakingaMergerSuccessfulResearchonMergerMotivesandOutcomes
IntroductionAglobewaveofmergersinvolvingbanks,securitiesfirms,insurancecompanies,andotherfinancial-serviceprovidershasbeenunderwayReflectsthegreatforcesofconsolidationandconvergencethataredramaticallyreshapingthefinancial-servicesindustryThistrendisdrivenbyIntensecompetitionDeregulationThesearchfortheoptimalsizefinancial-servicesorganization
MergersontheRiseManyofthemergerssweepingthroughthebankingindustryreflectlowerlegalbarriersthatpreviouslyprohibitedorrestrictedexpansionForexample,intheU.S.,theRiegle-NealInterstateBankingActof1994andtheGramm-Leach-Bliley(GLB)Actof1999TheGLBlawopenedwidethearenaforbank–nonbankfinancial-servicecombinationsPermitsbanks,insurancecompanies,andsecurityfirmstoacquireeachotherCriticsoftheGLBlawarguethatwhileGLBmayresultinreducingU.S.financialfirms’riskexposure,itdoesnotappeartoholdgreatpromiseformajorimprovementsinoperatingefficiency
MergersontheRise(continued)CompetitionamongEuropeanfinancialfirmsisbecomingmoreintense,leadingtocontinuingmergersandacquisitionsFinancial-servicemergersinEuropehaveslowedfromtimetotimeduetoaslowingeconomyandEuropeangovernmentsattemptstoprotecttheirhomebanksfromacquisitionbyoutsidersAsiaandJapanalsohaveexperiencedagrowingnumberofmergersDuetoanefforttoshoreupcreditqualityproblems,fendofftheravagesofdeflationandsluggisheconomies,andcompetewithpowerfulU.S.andEuropeanbanks
TABLE19–1RecentLeadingInternationalFinancial-ServiceMergersandAcquisitions
TABLE19–2SomeoftheLargestFinancial-ServiceMergersandAcquisitionsinAmericanHistory
TheMotivesBehindtheRapidGrowthofFinancial-ServiceMergersMergersusuallyoccurbecauseThestockholdersinvolvedexpecttoincreasetheirwealthorreducetheirriskexposureManagementexpectstogainhighersalariesandemployeebenefits,greaterjobsecurity,orgreaterprestigefrommanagingalargerfirmBothstockholdersandmanagementmayreapbenefitsfromamerger
TheMotivesBehindtheRapidGrowthofFinancial-ServiceMergers(continued)ProfitPotentialSomearguethattherecentincreaseinfinancial-servicemergersreflectstheexpectationofstockholdersthatprofitpotentialwillincreaseonceamergeriscompletedIftheacquiringorganizationhasmoreskillfulmanagementthanthefirmitacquires,revenuesandearningsmayriseEspeciallytrueofinterstateorinternationalmergerswheremanynewmarketsareenteredIftheacquiringfirm’smanagementisbettertrainedthanthemanagementoftheacquiredinstitution,theefficiencyofthemergedorganizationmayincreaseMayresultinmorecontroloveroperatingexpenses
TheMotivesBehindtheRapidGrowthofFinancial-ServiceMergers(continued)RiskReductionManymergerpartnersanticipatereducedcashflowriskandreducedearningsriskThelowerriskmayarisebecauseMergersincreasetheoverallsizeandprestigeofanorganizationOpenupnewmarketswithdifferenteconomiccharacteristicsfrommarketsalreadyservedMakepossibletheofferingofnewserviceswhosecashflowsaredifferentintimingfromcashflowsgeneratedbyexistingservicesMergerscanresultinamorestablefinancialfirm,abletowithstandfluctuationsineconomicconditions
TheMotivesBehindtheRapidGrowthofFinancial-ServiceMergers(continued)RescueofFailingInstitutionsThefailureofacompanyisoftenamotiveformergerManybankmergershavebeenencouragedbytheFDICasawaytoconservefederaldepositinsurancereservesandavoidaninterruptionofcustomerservicewhenadepositoryinstitutionisabouttofailThegreatcreditcrunchof2007–2009resultedinnumerousfinancialfirmseitherfailingorinrealtroubleforwhichmergersandacquisitionswereoftentheonlyoption
TheMotivesBehindtheRapidGrowthofFinancial-ServiceMergers(continued)RescueofFailingInstitutions
TheMotivesBehindtheRapidGrowthofFinancial-ServiceMergers(continued)TaxandMarket-PositioningMotiveManymergersarisefromexpectedtaxbenefitsEspeciallywheretheacquiredfirmhasearningslossesthatcanbeusedtooffsettaxableprofitsoftheacquirerTheremayalsobemarket-positioningbenefitsAmergerwillpermittheacquiringinstitutiontoacquireabaseinacompletelynewmarketExamplesofU.S.market-positioningacquisitions:BankofAmericaCorp.acquiringFleetBostonFinancialCorp.WachoviaCorp.acquiringGoldenWestCapitalOneCorp.acquiringNorthForkBancorpandHiberniaCorp.
TheMotivesBehindtheRapidGrowthofFinancial-ServiceMergers(continued)TheCostSavingsorEfficiencyMotiveLarge-scalestaffreductionsandsavingsfromeliminatingduplicatefacilitieshavefollowedinthewakeofsomeofthelargestmergersinthefinancial-servicessectorResearchhasshownthatsometimesthesinglemostimportantmergermotivationwasthedesiretoreduceoperatingcostsfollowedbyaplantodiversifyintonewmarketsManymergersareofthemarketextensiontypeMeansthatthemerginginstitutionsdonotoverlapmuchoratallintermsofgeographicareaserved
TheMotivesBehindtheRapidGrowthofFinancial-ServiceMergers(continued)MergersasaDeviceforReducingCompetitionWhentwocompetitorsareallowedtomerge,thepublicisservedbyfewerrivalsfortheirbusinessServicequalitymaydiminishandpricesandprofitsmayriseMoreaggressiveprosecutionoftheantitrustlawsmayneedtobeconsidered
TheMotivesBehindtheRapidGrowthofFinancial-ServiceMergers(continued)MergersasaDeviceforMaximizingManagement’sWelfare(AnAgencyProblem)Managementmayviewaprospectiveacquisitionasawaytoincreasesalariesandemployeebenefits,lowertheriskofbeingfired,andenhancemanagers’reputationinthelabormarketfromworkingforabiggerfirmIfmanagersreapthesebenefitsattheexpenseofcompanystockholders,anagencyproblememerges
TheMotivesBehindtheRapidGrowthofFinancial-ServiceMergers(continued)OtherMergerMotivesIncreasedgrowthcapacityEnablesalendinginstitutiontoexpanditsloanlimittobetteraccommodatelargeandgrowingcorporatecustomersThisisparticularlyimportantinmarketswherethelender’sprincipalbusinesscustomersmaybegrowingmorerapidlythanthelendinginstitutionitselfGivesmallerinstitutionsaccesstocapablenewmanagementandcostlynewelectronictechnology
SelectingaSuitableMergerPartnerHowcanmanagementandtheownersofafinancialfirmdecideifaproposedmergerisgoodfortheorganization?Measureboththecostsandbenefitsofaproposedmerger(noteasytodo)AmergerisbeneficialtothestockholdersinthelongrunifitincreasesthestockpricepershareThepriceofafinancialfirm’sstockdependsuponTheexpectedstreamoffuturedividendsflowingtothestockholdersThediscountfactorappliedtothefuturestockdividendstream,basedontherateofreturnrequiredbyinvestmentsofcomparablerisk
SelectingaSuitableMergerPartner(continued)Inordertomaximizestockholdervalue,theproposedmergershouldImproveOperatingEfficiency(reduceoperatingcostperunitofoutput)ConsolidateoperationsandeliminateduplicationGeographicDiversificationProductLineDiversificationFindanacquisitiontargetwhoseearningsorcashflowarenegativelycorrelated(orhavealowpositivecorrelation)withtheacquiringorganization’scashflows
SelectingaSuitableMergerPartner(continued)Amajorconsiderationinanyproposedmergerisitsprobableimpactontheearningspershare(EPS)ofthesurvivingfirmStockholdersofbothacquiringandacquiredinstitutionswillexperienceagaininearningspershareofstockifbothofthefollowingoccurAcompanywithahigherprice-to-earnings(P-E)ratioacquiresacompanywithalowerP-EratioCombinedearningsdonotfallafterthemergerInthisinstance,EPSwillriseeveniftheacquiredinstitution’sstockholdersarepaidareasonablepremiumfortheirshares
SelectingaSuitableMergerPartner(continued)Aslongastheacquiringinstitution’sP-Eratioislargerthantheacquiredfirm’sP-Eratio,thereisroomforpayingtheacquiredcompany’sshareholdersamergerpremiumHigh-premiumdealsoftenyielddisappointingresultsforthestockholdersoftheacquiringfirm
SelectingaSuitableMergerPartner(continued)ExchangeRatioThenumberofsharesofstockofferedbyanacquiringbankforeachshareofstockoftheacquiredbankDilutionofOwnershipSpreadingthefirm’sownershipovermorestockholderssothattheaverageshareholder’sproportionoffirmownershipdeclinesResultsfromofferingtheacquiredfirm’sstockholdersanexcessivenumberofnewsharesrelativetothevalueoftheiroldsharesDilutionofEarningsSpreadingafixedamountofearningsovermoresharesofstocksothattheEPSofthecombinedfirmdeclinesWilloccuriftheP-EofthefirmtobeacquiredisgreaterthantheP-Eoftheacquiringfirm
TheMergerandAcquisitionRoutetoGrowthTheacquiredfirm(usuallythesmallerofthetwo)givesupitscharterandadoptsanewname(usuallythenameoftheacquiringorganization)TheassetsandliabilitiesoftheacquiredfirmareaddedtothoseoftheacquiringinstitutionAmergernormallyoccursaftermanagementsoftheacquiringandacquiredorganizationshavestruckadealProposedtransactionmustthenberatifiedbytheboardofdirectorsofeachorganizationandpossiblybyavoteofeachfirm’scommonstockholders.
TheMergerandAcquisitionRoutetoGrowth(continued)Ifthestockholdersapprove(usuallybyatleastatwo-thirdsmajority),theunitofgovernmentthatissuedtheoriginalcharterofincorporationmustbenotified,alongwithanyregulatoryagenciesthathavesupervisoryauthorityovertheinstitutionsinvolvedIntheU.S.,thefederalbankingagencieshave30daystocommentonthemergeroftwofederallysupervisedbanksThereisa30-dayperiodforpubliccommentsaswellPublicnoticethatamergerapplicationhasbeenfiledmustappearinanewspaperofgeneralcirculationservingthecommunitieswherethemainofficesofthebanksinvolvedarelocatedTheU.S.JusticeDepartmentcanbringsuitifitbelievescompetitionwouldbesignificantlyreducedaftertheproposedmerger
TheMergerandAcquisitionRoutetoGrowth(continued)TheprincipalcharacteristicsofthetargetedinstitutionthatareexaminedbythepotentialacquirerfallintosixbroadcategoriesThefirm’shistory,ownership,andmanagementTheconditionofitsbalancesheetThefirm’strackrecordofgrowthandoperatingperformanceTheconditionofitsincomestatementandcashflowTheconditionandprospectsofthelocaleconomyservedbythetargetedinstitutionThecompetitivestructureofthemarketinwhichthefirmoperates(asindicatedbyanybarrierstoentry,marketshares,anddegreeofmarketconcentration)
TheMergerandAcquisitionRoutetoGrowth(continued)Inaddition,potentialacquirerswilllookatthesefactorsaswellThecomparativemanagementstylesofthemergingorganizationsTheprincipalcustomersthetargetedinstitutionservesCurrentpersonnelandemployeebenefitsCompatibilityofaccountingandmanagementinformationsystemsamongthemergingcompaniesConditionofthetargetedinstitution’sphysicalassetsOwnershipandearningsdilutionbeforeandaftertheproposedmerger
MethodsofConsummatingMergerTransactionsMergersusuallytakeplaceemployingoneoftwomethodsPoolingofinterestsPurchaseaccountingFormergersbegunbeforeJuly1,2001,theFinancialAccountingStandardsBoard(FASB)permitteduseofthepoolingofinterestsMergerpartnersmerelysumthevolumeoftheirassets,liabilities,andequityintheamountsrecordedjustbeforetheirmergertakesplace
MethodsofConsummatingMergerTransactions(continued)Incontrast,underpurchaseaccountingthefirmtobeacquiredisvaluedatitspurchasepriceandthatpriceisaddedtothetotalassetsoftheacquirerTheacquirerrecordstheacquisitionatthepricepaidbutmustvaluetheacquiredfirmatmarketvalueplusgoodwill(iftheacquisitionpriceandmarketvaluearedifferent)NogoodwillisfiguredinwhenusingthepoolingofinterestsapproachAfter2001,thepoolingofinterestmethodformergeraccountingwaseliminatedforU.S.financialfirms
MethodsofConsummatingMergerTransactions(continued)AnotherwaytoviewthemergerprocessistodetermineexactlywhattheacquirerisbuyinginthetransactionAssetsorsharesofstockPurchase-of-assetsmethodTheacquiringinstitutionbuysalloraportionoftheassetsoftheacquiredinstitution,usingeithercashoritsownstockTheacquiredinstitutionusuallydistributesthecashorstocktoitsshareholdersintheformofaliquidatingdividendandtheacquiredorganizationisthendissolved
MethodsofConsummatingMergerTransactions(continued)Purchase-of-stockmethodTheacquiringfirmassumesalloftheacquiredfirm’sassetsandliabilitiesandtheacquiredfirmceasestoexistWhilecashmaybeusedtosettleeithertypeofmergertransaction,inthecaseofcommercialbanks,regulationsrequirethatallbutthesmallestmergersandacquisitionsbepaidforbyissuingadditionalstockoftheacquirerAstocktransactionhastheadvantageofnotbeingsubjecttotaxationuntilthestockissold,whilecashpaymentsareusuallysubjecttoimmediatetaxation
MethodsofConsummatingMergerTransactions(continued)ThemostfrequentkindofmergeramongdepositoryinstitutionsinvolveswholesalebanksmergingwithsmallerretailbanksLetsmoneycenterbanksgainaccesstorelativelylow-cost,lessinterest-sensitiveconsumeraccountsandchannelthosedepositedfundsintoprofitablecorporateloans
RegulatoryRulesforBankMergersintheUnitedStatesTwosetsofrulesgenerallygovernthemergersofbanksandotherfinancialfirms:DecisionsbycourtsoflawStatutesenactedbylegislators,reinforcedbyregulationsForexample,theShermanAntitrustActof1890andtheClaytonActof1914forbidmergersthatwouldresultinmonopoliesorsignificantlylessencompetitioninanyindustryWheneveranysuchmergerisproposed,itmustbechallengedincourtbytheU.S.DepartmentofJustice
RegulatoryRulesforBankMergersintheUnitedStates(continued)TheBankMergerActof1960RequireseachmergingbanktorequestapprovalfromitsprincipalfederalregulatoryagencybeforeamergercantakeplaceNationalBanks–ComptrolleroftheCurrencyStateMemberBanks–FederalReserveStateInsuredBanks–FDICEachfederalagencymustgivetopprioritytothecompetitiveeffectsofaproposedmergerMergerswithanti-competitiveeffectsmaybeapprovedifitcanbeshownthattherearesignificantpublicbenefitsForexample,providingconvenientservicesorrescuingafailingbank
RegulatoryRulesforBankMergersintheUnitedStates(continued)ThedegreeofconcentrationinamarketismeasuredbytheproportionofassetsordepositscontrolledbythelargestinstitutionsservingthatmarketTheJusticeDepartmentguidelinesrequirecalculationoftheHerfindahl-HirschmanIndex(HHI)asasummarymeasureofmarketconcentrationItisthesumofthesquaredmarketshareforallbanksinaspecificmarketareawhereAirepresentsthepercentageofmarket-areadeposits,assets,orsalescontrolledbytheithfinancialfirminthemarket,andtherearekfinancialfirmsintotalservingthemarket
RegulatoryRulesforBankMergersintheUnitedStates(continued)UnderthelatestDepartmentofJustice(DOJ)GuidelinesIfamarkethasapostmergerHHIbelow1,000points,thenthemarketisunconcentrated;nofurtherDOJreviewAmarketisconsideredmoderatelyconcentratedifitspostmergerHHIis1,000to1,800pointsandasaresultoftheproposedmergerthechangeintheHHIislessthan100points;usuallynofurtherDOJreview(unlessthechangeintheHHI>100points)
RegulatoryRulesforBankMergersintheUnitedStates(continued)UnderthelatestDepartmentofJustice(DOJ)GuidelinesAmarketisconsideredhighlyconcentratedifthepostmergerHHIliesabove1,800pointsandthepostmergerchangeintheHHIexceeds50points;usuallynofurtherDOJreview(unlessthechangeintheHHI>50points)IfthechangeintheHHI>100pointsinahighlyconcentratedmarket,significantcompetitiveissueswillberaisedandasuittoblocktheproposedmergermaybefiledbytheDOJ
TheMergerRulesinEuropeandAsiaTheEuropeanCommission–anexecutivebodyoftheEuropeanCommunitycurrentlybasedinBrussels–hasemergedasakeymediatorofmergersinvolvingEuropeanbusinessesBecausetheEuropeanCommissioncannotbreakapartamergerafterthatcombinationhasoccurred,theBrusselscommissionhasbeensomewhatmoreaggressiveindenyingsomecompaniespermissiontomergeThedoctrineofcollectivedominancesuggeststhatifasignificantEuropeanmarketwouldbecomesoconcentratedasaresultofaproposedmergerthatonlyaboutfourfirmswouldcometodominatethatmarket,thentheEuropeanCommissionmayvotetoblockanyfurthermarketconcentration
TheMergerRulesinEuropeandAsia(continued)InAsia,mergerrulesareinastateoffluxasleadingnationsseektomodernizetheirmergerreviewprocessanddevelopmoredefinitiveguidelinesformergingfirmsInassessingaproposedmergers,AsianauthoritiesemphasizeMarketshareAvailabilityofalternativesourcesofsupplyfortheconsumerWhetherforeignfirmsareinvolvedthatwillsignificantlyimpactdomesticinstitutionsinadangerouswayMergersthatappeartorescuelosingdomesticcompanies,protectjobs,andbringnewtechnologiesandmanagerialtalentintothehostcountryoftenreceivefavorablerulings
MakingaSuccessofaMergerManymergerssimplydonotworkAvarietyoffactorsoftengetinthewayPoormanagementMismatchofcorporateculturesandstylesExcessivepricespaidbytheacquirerfortheacquiredfirmFailuretotakeintoaccountthecustomers’feelingsandconcernsLackofstrategic“fit”betweenthecombiningcompanies
MakingaSuccessofaMerger(continued)HelpfulstepsthatimprovethechancesforadesirablemergeroutcomeAcquirermuststartbyevaluatingitsownfinancialconditionMusthavedetailedanalysisofpossiblenewmarketsMustestablisharealisticpricefortargetfirmAftermerger,combinedteammustdirectprogresstowardsconsolidationMustestablishcommunicationbetweenseniormanagementandallemployeesMustcreatecommunicationchannelsforcustomersandemployeestounderstandwhymergertookplaceShouldcreatecustomeradvisorypanelstoevaluateandcommentonmergedbank’simageandproducts
ResearchFindingsontheImpactofFinancial-ServiceMergersTheFinancialandEconomicImpactofAcquisitionsandMergersMerger-activefinancialcompaniestendtogrowfasterthannonmergingfirmsGenerally,acquiringfinancialfirms,onaverage,arenotmoreprofitablethanthefirmstheybuyThissuggeststhatmanagementoftheacquiringfirmhopestobuyintosuccessAcquiredcompaniesareoftensignificantlylessprofitablethanthefirmstheycompetewithAcquirerspaysizablepremiumsfortargetfirmsThus,stockholdersofacquiredcompaniesoftengainafinancialadvantage,whileacquirersoftenwindupwithmixedresults
ResearchFindingsontheImpactofFinancial-ServiceMergers(continued)PublicBenefitsfromMergersandAcquisitionsResearchhasfoundfewrealbenefitsfromthepublic’sperspectiveOnthepositiveside,thereisnoconvincingevidencethatthepublichassufferedfromadeclineinservicequalityorinserviceavailabilityThereisalsosomeevidencethatbankfailureratesdeclineinthewakeofmergeractivityMergersandacquisitionsusuallyhavemultipleoutcomesandgenerateamixtureofwinnersandlosers
QuickQuizWhatfactorsshouldafinancialfirmconsiderwhenchoosingagoodmergerpartner?Whatfactorsmusttheregulatoryauthoritiesconsiderwhendecidingwhethertoapproveordenyamerger?Whenisamarkettooconcentratedtoallowamergertoproceed?Doesitappearthatmostmergersservethepublicinterest?