Merger Theory, Stock Returns and Deal Drivers – The Impact of International Bank M&As on Targets, Bidders and Peers

May 30th 2008

Our paper empirically analyzes the capital market perception of deal drivers of bank M&As. Using event study methodology we investigate abnormal returns of targets, bidders, and their five most likely transaction peers upon takeover and closing or termination announcements. Comparing acquisition probability, pre-emptive merger, collusive merger, as well as economies of scale and scope hypothesis we derive which theory explains the observed share price reactions best. Based on a sample of 691 bank M&As in North America and Europe in the period from 1995 to 2008 we find surprising results: Although our descriptive statistics and corresponding significance levels are in-line with previous literature, the collusive merger hypothesis offers the highest explanatory power for international bank M&As. This is a new empirical result since the collusion theory has been rejected by researchers so far. However, due to the obvious challenge to realize economies of scale within the banking sector, collusion might be a good opportunity for banks to achieve safe merger gains. Especially in the context of the ongoing scientific discussion and mixed empirical results about the existence of scale economies in the banking industry our collusion story seems plausible. Moreover, our results offer potential for future research investigating the empirical fit of the collusion theory via new methodologies.

Keywords: M&A, Banks, Peer Returns, Event Study, Imperfect Competition JEL-Classification: G34, G14, G20, L13

1. Introduction
The analysis of past M&A transactions and the respective market reactions to those transactions suggests that rationales behind mergers and acquisitions are often ambiguous. In theory, the economically most desirable motives are synergies which improve profits and enhance firm value. Upon announcement of a...