Financial Determinants of Bank Takeovers: Note

Abstract

In recent years more takeovers have occurred in banking than in any other industry (Mergers & Acquisitions 1987). This activity resulted partly from liberalized laws affecting branch and interstate banking and partly from the number of failed banks. t As more states liberalize their laws regarding banking structure and regional pacts, takeovers of bank and nonbank financial institutions are expected to increase.2 Thus, understanding the determinants of the prices paid in bank takeovers is important to the large portion of the banking industry that is either a potential target or potential bidder, or both. Greater knowledge of the determinants of purchase prices can also help shed light on commercial bank operations.3 Several recent studies examine the determinants of bank merger pricing. These studies tend to focus on the characteristics of the target, and to downplay the characteristics of the acquiror. These studies also tend to use a single proxy for each theoretical effect, for example, one measure of the target's earnings. The individual studies are reviewed below, but in general they find a positive relationship between purchase price and some measure of the target's potential growth and a negative relationship between purchase price and some measure of the ratio of the target's total assets to the acquiror's total assets. Other variables, including those for the target's profitability, are sometimes but not always statistically significant. One difference between this study and prior studies is that this study places greater emphasis on acquiror-related characteristics. Acquirors tend to pay a premium for a controlling interest in banks. This premium suggests that the firm

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