Middle Eastern Finance and Economics ISSN: 1450-2889 Issue 15 (2011) © EuroJournals Publishing, Inc.

2011 http://www.eurojournals.com/MEFE.htm

Analysing the Motives and the Outcomes of Bank Mergers
Ali Awdeh Faculty of Economics and Business Administration, Department of Finance The Lebanese University, Hadath, Lebanon E-mail: ali.awdeh@ul.edu.lb Chawki EL-Moussawi Faculty of Economics and Business Administration, Department of Economics The Lebanese University, Hadath, Lebanon E-mail: chawmoussawi@ul.edu.lb Abstract We have examined in this study the bank mergers experience in Lebanon, where between 1994 and 2002, 25 bank merger operations took place. Firstly, we have compared the characteristics of acquiring and acquired banks, in order to identify the differences between the two groups. Secondly, we have detected the changes in performance associated with these mergers. Our empirical results show a significant differences between the two categories in terms of profitability (ROE and NIM), in traditional cost measures (cost-toincome and staff expenses), in favour of acquiring banks. Besides, acquiring banks have been larger (in terms of assets), with better risk profile. However, no significant difference in productive efficiency was observed. The comparison of the performance measures of banks before and after the acquisition shows a slight improvement in profitability and efficiency, with some decline in productive efficiency and considerable increase in credit risk.

Keywords: Mergers; Acquisitions; Bank performance; Industry consolidation.

1. Introduction
The globalisation of international markets and the mounting of cross border activities have made businesses ever more global. Additionally, the implementation of financial liberalisation and deregulation all over the world has led to an increase in the number of institutions merging domestically or across borders. Mergers and acquisitions are indeed important corporate decisions with considerable long-term effects on companies involved. These effects are related to capital, organisational structures, ownership structures, product mix, and the nature of the business’s activities. They result in removing identical and duplicate costs – such as personnel, offices and machinery – whilst increasing the overall market share. Consequently, M&As could achieve growth of company’s size and value, revenues and profits through reduction of expenditures, increase in market power, decrease of earnings volatility, and scale and scope economies. In developed economies, market forces trigger M&A operations, whereas in emerging markets the financial and/or monetary authorities play a major role in bank consolidations. Bank M&As in emerging markets are one way of dealing with problems resulting from systemic banking crises or

This could be achieved by aggregating the values of the merged firms. Gelos and Roldos (2002) and Shih (2003) state that bank M&As in emerging markets are guided and directed by the authorities and market forces are absent in these processes. the average cost-to-income ratios were 82.74% and 71. During or following banking crises. we shed light on the literature regarding the motives and the consequences of bank M&As. M&A decisions are based on the theory that managers serve the interest of shareholders and maximise their wealth.41%. to be agreed upon by contract between Banque du Liban and the merging bank.46% and 24% successively. contracts of some employees in the merged bank may be terminated. 2. This study will analyse the bank mergers experience in Lebanon. such as tighter capital requirements. This Law was reinstated by Article 1 of Law No. On the other hand.94% successively. the Banque du Liban’s Central Council may grant the merged bank “soft loans”. and the average ROA were 0. Motives for Bank M&As There are many motives for bank M&A decisions. many large banks targeted medium and small banks to expand their branch networks. Section 5 illustrates the data exploited. The second part will gauge the effect of mergers on the operational performance of merged banks and how the corporate performance changes following the merger. which could also be overlapped. we will analysis the differences between acquiring and acquired banks in terms of operational performance to understand the discriminating characteristics of both groups. accepted takeover bids. 0. Twenty five merger operations occurred under the Law of Bank Mergers between 1994 and 2002. and will implement in addition. In this context. the Central Council may exempt the merged bank from income tax for an amount equivalent to taxes due on a portion of its profits. the restriction of new branch opening to only two per year influenced large banks willing to expand faster and forced them to look for external growth choice. The methodology of the paper is explained in section 4. the central bank (Banque du Liban) decided to reform and restructure the banking system in order to avoid a potential banking crisis.61% successively. efficiency 1 The incentives are as follows: (1) within a six-month period from Banque du Liban’s Central Council’s final approval. 1. . 2005. and will be divided into two parts. Vis-à-vis the law of facilitating bank mergers. Consequently. One of the most important decisions was encouraging banks to consolidate by the law 192. 1993. the provisions for doubtful loans-to-gross loan ratios were 33.1 The central bank exploited this law repeatedly to encourage the consolidation of banks in order to gradually stabilise the banking system by eliminating the unstable banks.66% and 1. the DEA method to capture the effect of acquisition on the productive efficiency of banks.38%. The rights of laid-off employees are limited to the compensation stipulated in the Article.Middle Eastern Finance and Economics . shall be exempted from stamp. 80. Baer and Nazmi (2000). to encourage small.43% and 0.and medium-sized banks unable to meet the new capital standards (the risk-based capital as per Basel Accord) to merge with larger ones. and (4) all formalities and procedures required by the merger operation. transfer and notary public fees. the authorities encourage (and sometimes enforce) banks to consolidate in order to reduce the risk of bank failures and minimise the financial and social cost of banking crises. provided this portion does not exceed the cost of the merger operation and a ceiling of two billion Lebanese pounds ($1 = LBP 1507). which implies cost reduction. 4. 1991 and 1992 the banking sector average equity-to-asset ratios were 1. Finally. and the increasingly competitive environment. smaller banks facing tough capital requirements. and the additional compensation is exempted from any income tax. the central bank has issued directives to “push” banks to merger. For instance.61% successively.34%. dated January. The decline of the regulatory control and supervision on the Lebanese banking sector during the 1980s has provoked a large number of undercapitalised and inefficient banks. and from all registration fees with the public administrations. These decisions aim to achieve the firm’s objectives and targets that form its strategy. This law aimed at facilitating bank mergers and offered several incentives for merged banks. we present the empirical results in section 6. 675 of February 14. (3) during the following year of the Central Council approval of the merger. including the issuance of new shares.53%. The study will go beyond the standard ratios methodology adopted by most studies on bank mergers. The remaining of the paper is as follows: in sections 2 and 3. in 1990. Consequently. 27. In the first part. (2) if needed. On the other hand.Issue 15 (2011) 7 individual bank run.

Berger et al. which are a result of economies of scale and scope. banks with significant lower performance might have a higher probability of being targeted and acquired than well-managed banks. Kolari and Zardkoohi (1987) show that small banks are not able to implement automated services as cost-effectively as larger banks. Synergy Synergy is the concept that when two or more firms combine.1.1.1. Economies of scope can be realised through joint production and marketing. the firm management might decide to execute a merger and/or acquisition to achieve goals for their own benefit and sometimes at the expense of shareholders. tellers. The synergy from a merger is defined as the difference in the market value of the post-merger firm relative to the pre-merger value of the two firms as separate entities. such as tellers and supervisors. The synergy has two subdivisions: financial and operating. and better management of the target’s assets. Thus. the less proportion of liquid assets to total assets is held. Financial synergy is the impact of a corporate merger or acquisition on the cost of capital of the acquiring firm or the merging entities. The main source of operating synergy is the relative cost reductions with the increased production. It occurs by replacing inefficient management and the transfer of assets from failing to rising firm. 2. profitable and stable than the separate individual firms before the combination. Cebenoyan and Strahan (2004) argue that large U. but over the long run. 2. Mueller (1977) argues that mergers are seen as an economical way to eliminat bad management. In financial markets. and at lower costs than traditional branching networks. Similarly. They add that this interdependence is especially common in banking. through the fusion of their skills and capabilities. sometimes. (1999) found that large institutions have the ability to produce more services due to the use of technological innovations. In other words.2. In a high level of production. scope economies may be achieved where facilities applied to one objective or to serving a single market are capable of being deployed simultaneously to serve other targets and other markets. Gilligan and Smirlock (1984) explain that economies of scope over the production of goods A and B exist if the cost of producing the two goods A and B jointly is less than their production costs separately. they increase their value.2. But. Economies of scale occur when there is ability to reduce costs per unit of output. The new formed entity is assumed to be more efficient. Scale Economies In banking. Scope Economies Economies of scope represent the ability of reducing the average per unit cost by producing more than one product concurrently. more efficient firms tend to takeover less efficient ones. They observed a negative correlation between bank size and liquid assets held. etc. 2. and e-banking. Miller and Noulas (1996) investigated technical efficiency of large-sized banks and found that bank size is positively related to the measure of technical efficiency.1. banks hold fewer liquid assets (which provide low or no returns) than smaller banks. Rose (1987) found that US acquired banks reported . larger companies have advantages that may lower their cost of capital because they are considered less risky than smaller ones (Penas and Unal. and the average cost of a product in the long run decreases as more units are produced. such as phone centres. when outputs (deposits) need similar technology and use the same personnel. On the production side. Elimination of Inefficient Management Inefficient management can exist for a limited period of time.Issue 15 (2011) enhancement. 2. In the following we cite some of the main motives for bank M&As. these costs could be spread over an expanded product mix. and the larger the bank.S. data processing systems. On the other hand.8 Middle Eastern Finance and Economics . ATMs. the market mechanism ensures that they are replaced. operating synergy is the real value gains from combining two (or more) individual companies. production requires the utilisation of costly resources such as branches. 2004).

(1999) claim that troubled or under-performing banks are often taken over as a better alternative to bankruptcy.S. (1996) state that sometimes foreign acquisitions are better than domestic acquisitions. which may open the way for improve profit from higher prices.5. Berger et al. which suggests that mergers are more beneficial to acquiring banks when the performance gap between targets and acquirers is wide. it was driven at the same by regulators who aimed at avoiding bank failures (Mishkin. Besides. Koetter and al. They finally found that target banks show a higher risk profile in their lending activity. (2007) found that merged banks have worse CAMEL profiles than non-merged banks. Thus the trend of bank M&As in the U.S. Besides. Bank M&As to Avoid Banking Crises When the banking sector is relatively healthy. such as encouraging or even forcing banks to merge. Finally. They tend to encourage and support efficient and healthy banks to acquire underperforming and unstable banks. Focarelli and Pozzolo (2001) argue that banks extend their activities in order to provide services to their homecountry clients in international transactions. Knapp et al. Increasing Market Share/Market Power Mergers could increase the market share of consolidated banks.. there is no urgency for policy makers to take actions to strengthen the banking sector. Peristiani (1997) showed that acquiring banks realised higher gains in profitability. Davis (2000) claims that from the point of view of executives.Issue 15 (2011) 9 significantly lower ROE. (2006) claimed that the average return for the acquirers in the year before the merger was significantly above the industry average. (1999) state that entering new markets is an understandable motive for M&As. especially if they needed to grow larger to remain competitive. 2. and tend to outperform the industry. In emerging markets.Middle Eastern Finance and Economics . Acquisitions seem to be the most efficient technique for banks to exist from business. 2000 and Boyd and Graham. which states that acquiring banks seek to replace the poorly performing target bank management with more skilled executives.3. was driven by market forces that have found that consolidations represent a way to stop the collapse of more banks. 2000). Hadlock et al. the gain of market share could be achieved only through acquisitions. They state that this is consistent with the efficient management hypothesis. In the U. and equity ratios than comparable non-acquired banks. 2. they even go further and enforce bank consolidations. whereas bankruptcy and liquidation are very costly for individual banks and for the entire banking system. Campa and Hernando (2006) analysed the performance of European financial industry M&As between 1998 and 2002 and found that M&As usually involved targets with lower operating performance than sector average. Mergers tend to reduce competition.4. Sometimes. Eun et al. besides being a market leader brings advantages of pricing power and cost economies. and it is the ability to set and maintain price above competitive levels. scale efficiency. the authorities interfere directly in bank M&As. Ely and Song (2000) found that this option was most attractive to institutions located in markets with little potential for growth. since earnings are less correlated across countries. and operating costs when they absorb under-performing targets. the wave of bank failures in early 1980s triggered a wave of bank M&As to avoid the liquidation of large number of failed banks. 2. Gelos and Roldos (2004) state that the consolidation trend in Central Europe since 2000 was driven by strong banks being forced to absorb . ROA. Market power is referred to as monopoly power. particularly for banks that have reached the practical limits of expansion in their home markets. but they are likely to take interventionist measures. acquirers had lower cost-to-income ratios than targets and demonstrated a better cost efficiency ratio than the sector average. Entry to New Markets The easiest and fastest way to enter a new market could be through the acquisition of an existing “player”. which may increase their market power. when the banking sector and the individual banks come under severe pressures. and overseas investment may be the preferred option to achieve growth and diversification.

Peristiani (1997) also found that in-market mergers do not yield any significant performance improvements post-merger. Hart and Apilado (2002) find a significant improvement in profitability for merging banks post-merger. However. (2002) find no evidence of an improvement in profits. For instance.10 Middle Eastern Finance and Economics . 3. Rhoades (1993) finds no indication of efficiency gains from horizontal bank mergers. they did not find gains resulted from mergers between large banks. to a greater ability to attract loans and deposits and to improve employees’ productivity and asset growth. Philippines and Thailand) have even forced failing banks to merge in order to avoid the forthcoming collapse of the banking sector. The rationale behind this is that the market “predicts” the success (failure) of the merger and reacts positively (negatively). Operational performance studies found variety of results according to the markets. Focarelli et al. . They also find that mergers are followed by an increase in ROE caused by a reduction 2 3 Shih (2003) shows that when policy makers merge a failing bank into a less distressed bank in attempt to save it. On the other hand. moreover. Chong et al. For a sample of US bank mergers. Chamberlain (1998) found significant gains realised by reduction of premises and salary expenses. Shih (2003) found that some governments of the Asian crisis countries (e. He also shows that it is probable that the more failing banks are merged to form a super bank. (2006) examined the impact of forced bank merger on the shareholders’ wealth of Malaysian banks and found that forced mergers destroy economic value. in crisis environment. there is no guarantee that the bank created by the merger will be safer than the failing bank. In case of banking crises. But the result is different when merging a group of healthy banks in a non-crisis environment. the risk of acquirers decreased after the merger. (2004) studied the effect of acquisitions on European Union credit entities performance and found that these acquisitions had a positive influence on bidders’ performance two to three years after the acquisitions. Conversely. authorities may force many failing banks to merge to create a “super bank” in an attempt to save all the failing banks at the same time. They stated that the post-merger increase in revenues was offset by an increase in labour costs.3 Craig and Dos Santos (1997) found that merged banks had a higher performance than the industry after the merger. and (2) the changes in operational performance. bank mergers are likely to create even weaker banks and worsen the banking sector problems. studies typically try to observe the outcomes through examining two phenomena: (1) the reaction of stock price to the announcement of M&As (event studies). Moreover. Policy makers in those countries believed that merging weak banks creates healthier ones. Vennet (1996) finds that European domestic acquisitions did not realise any efficiency gains. McAllister and McManus (1993) found that consolidation among small banks would likely lead to improved cost efficiency. samples or period studied. and acquiring banks tend to gain at the expense of target banks. at least partly. The (Operational) Consequences of Bank M&As A large body of literature examined the consequences of bank M&As. the greater the bankruptcy risk that the super bank faces would be. the authorities also carried a process of guided consolidation that has dramatically reduced the number of banks.g. operational performance studies analyse the accounting data of merged banks before and after the merger to identify any significant changes in the performance of merged banks. Cornett and Tehranian (1992) found that merged banks in the U. Diaz Diaz et al. For instance. which indicates that horizontal mergers with a relatively large degree of overlap do not result in efficiency gains. experience greater improvements in their corporate performance than the banking sector as a whole.Issue 15 (2011) weaker ones to ensure the stability of national banking systems. In Argentina and Brazil. He argues that managerialist motives provide an explanation for these mergers. The intention of event studies is to detect any abnormalities in stock returns to the acquiring and/or the acquired banks resulted from the merger announcement. and merging weak banks with healthier ones reduces the risk of bank failures.S.2 The intervention of government doesn’t have always a positive effect. That was due to. In analysing the effects of bank mergers and acquisitions.

The changes in operational performance will be calculated as follow:5 post pre ∆X cons (i. several empirical studies have employed the same time window. Analysing Bank Mergers 4. in a period surrounding the consolidation. X pre (i ) is the performance measure of acquiring bank i pre-merger. 4.Middle Eastern Finance and Economics . The year of the merger is left out of analysis as it is a transition period. j ) is the difference of pre-merger performance measures of acquiring bank i and acquired bank j. Rhoades (1998) summarised nine (in-market) bank mergers and found that roughly one-half of savings from mergers occurs during the first year. j ) is the difference of the post-merger performance measure of the consolidated entity and the weighted-average performance measures of acquiring bank i and acquired bank j. Therefore. j ) = X cons (i + j ) − X cons (i + j ) (2) where. we will compare the pre-merger operational performance of those banks. The sector-adjusted figures will be implemented also. For each of the years that surround the consolidation. and all savings were fully achieved and all gains were realised within three years after the merger. Cornett and Tahranian (1992). which may also predict the merger outcome. we follow Cornett and Tahranian (1992). and X pre ( j ) is the performance measure of acquired bank j pre-merger. For instance. Rezitis (2008) found negative effects of M&As on technical efficiency and total factor productivity growth of Greek banks. On the other hand. In fact. .6 The indicators of combined firms are weighted-average.Issue 15 (2011) 11 in capital. using relative sizes (total assets) as weights. The comparison of the performance allows testing if better-managed banks takeover underperforming ones. ∆X cons (i. we study a period of three years prior to the merger and a consistent post-merger period. to eliminate this effect of industry trends. pre-merger. and X cons (i + j ) is the weighted-average performance measures of the acquiring and acquired banks pre-merger. The performance measures of merged banks could be affected by both firm-specific influences and industry trends. j ) = X pre (i) − X pre ( j ) (1) where. ∆X pre (i. the mean values of the implemented performance measures for merged banks are calculated. Additionally. 4 5 6 They detected a post-acquisition long-run increase in profitability for acquired banks. a hypothetical combined bank is created as a proxy for the performance of banks pre-merger. Vennet (1996). In addition. (1992) and Vennet (1996) implemented a period of three years before and three years after the merger. Davis (2000) analysed the sources of savings resulting from bank mergers and the time necessary to captures these savings. post pre X cons (i + j ) is the performance measure of the consolidated entity post-merger. in order to detect the financial effect of mergers on acquirers. He found that the time necessary to capture all cost savings ranges from 1 to 3 years. the difference in (pre-merger) performance may help detecting the relationship between the success of a merger and the characteristics of merged banks. The comparison of the performance measure (X) of acquiring and acquired banks pre-merger is as follows: ∆X pre (i. Healy et al. Therefore.4 Finally. The pre-merger performance measures are calculated by aggregating the indicators for merged banks during three years prior to the merger. This value is calculated as follows: A pre ( j ) A pre ( j ) (3) X pre (i + j ) = × X pre ( j ) + × X pre (i) cons A pre ( j ) + A pre ( j ) A pre ( j ) + A pre ( j ) where. the (premerger) consolidated figures will be compared with those of the merged entity (post-merger).1. These measures are calculated by subtracting the sector means from the sample data. due to a permanent decrease in bad loans accompanied by a long-term reduction in lending. Methodology To detect the differences in characteristics between acquiring and acquired banks. and Pilloff (1996) and implement the sector-adjusted measures.

leaving the overall efficiency unchanged. The production approach7 used in this paper is based on using interest paid. 5. we use assets and deposits market shares of merged banks.e. three growth measures will be implemented: the growth rates of assets. and general operating expenses as inputs. Therefore. allocative efficiency (AE). and growth.e. A pre ( j ) is the target bank j assets pre-merger. An analysis of the expense behaviour could provide a clearer image of the operating effects of mergers. staff expenses. 4.2. Changes in profitability following the acquisition may not only be the result of an increase in revenues and/or decrease in costs. Therefore. and loans. we will look at the overall level of productive efficiency of merged banks. whereas total earning assets. i. The definition of the variables is presented in Appendix A. deposits. and to analyse its effect on the merger outcome. but may simply be the result of a change in lending policies that may worsen the overall quality of loan portfolio.e. see for instance Freixas and Rocher (1997). during which the 25 merger operations occurred. and cost efficiency (CE). with maximum score of 1 (i. we will use the traditional profitability measures. the bidders have absorbed their targets and formed one single entity post-merger. .Issue 15 (2011) pre X cons (i + j ) is the weighted-average performance measures of the acquiring and acquired banks pre-merger. cost reduction can be accompanied by a reduction of outputs.12 Middle Eastern Finance and Economics . we will compute three measures: technical efficiency (TE). 7 8 9 For more details regarding the different approaches in this context. and X pre ( j ) is the performance measure of acquired bank j pre-merger. and indicate whether the observed benefits are related to revenue or to cost effects. ROE and ROA. Another motive for the takeover could be the aim to achieve external growth as an alternative for internal growth. Therefore.8 Regarding the financial ratios. total deposits. Data and Descriptive Statistics The period under study covers 14 years. and reduced expenses should translate into higher profit. see Awdeh and El Moussawi (2009). to detect the difference in the size of acquiring and acquired banks. To control for this. For illustration of the DEA methodology used to measure the components of the productive efficiency in this paper. To test the overall productive efficiency. in addition to analysing the traditional financial ratios.9 To examine the profitability. This will be done by using the DEA method to calculate the various components of the productive efficiency. i. X pre (i ) is the performance measure of acquiring bank i pre-merger. two cost ratios are implemented: the cost-to-income ratio (COST) and the staff-expenses-to-average assets ratio (STAFF) with particular focus to the latter because it consists a major component of overall expenses. The merger operations are “full mergers”. the following will be exploited. Finally. Nevertheless. Asset utilisation (AU) will also investigate the asset productivity. Performance Measures Most of the empirical studies on bank mergers analyse sets of financial ratios to detect the effect of acquisition on operational performance. and off-balance sheet items are used as outputs. These three measures unlike financial ratios are scores. The net interest margin (NIM) will be used to test the effect of the core intermediation business. Those ratios (the performance measures) consist of variables that aim at capturing bank profitability. operational efficiency. The increase in efficiency could be a potential benefit of mergers. for an efficient firm). we implement indicators for two types of risks: capital risk (EQUITY) and credit risk (CREDIT). A pre (i ) is the acquiring bank i assets pre-merger.

94 (1. the average ROE of acquiring banks is 14. and overall performance.71) 1.34 (1.71% for assets and 3.88) 2.00 (0.75 (57.91%. Table 2 presents the bank-mean measures of acquiring and acquired banks.23 (1.45) 4.48% for assets. The main source of data is BilanBanques.18) 111.94 (0.54% for both assets and deposits. Regarding efficiency indicators.80) 2. Additionally. Finally.48% for acquired banks.80) 0. The average market share for acquires was 3. the dispersion of these measures is much lower for acquiring banks. acquires reported an average size of $ 1. regarding the average size of the two categories of banks particularly at t-1.58 (2.00) ROE ROA AU NIM COST STAFF TE . profit.14) T-1 0. Other data were obtained from some of the acquiring banks.33) 3. compared to -0. the difference is clearly observed.34) 3.23) 3.33) 0.40 (15. during each of the three years before the acquisition. AU and NIM were 1.41% for loans. Besides. The difference in performance between acquiring and acquired banks is observed particularly in the year preceding the takeover (t-1).98) 68.29 (1. compared to $ 219 million for acquired banks.73 (70.98) 71.00 (0. targets growth ratios were -3.Middle Eastern Finance and Economics .53) 0.74 (2.08) T-3 -6.61) 106. Table 2: Development of acquiring and acquired banks performance measures T-3 18.20 (0.00) 0.35 (5. where acquiring banks provisions for doubtful loans-to-loan ratio is 14.77% for deposits at t-1.06% successively. whereas for target banks they were 0.77% and 1.71 (20.7% and 1.10) 0. and 0.89%. 3.11) Acquiring T-2 15. which provides annual financial statements for banks operating in Lebanon.96 (0.97 (0.15 (6.60 (2. the growth rates of bidders were 36. This shows that acquired banks are unstable and have volatile earnings. On the other hand. Concerning credit risk.88 (0. compare to 106.94) 1.95 (0.08) 2.74 (2.25% for acquired banks.77) 4.96) 1.28 (2.77 (69.06 (0.23) 5. the former’s ROA.41) -0.31%. particularly at t-1. This difference in cost is not clearly translated into differences in the productive efficiency of the two groups.34 (1. We notice that the scores are very close and sometimes higher for the acquired banks (specifically at t-1). compared to 33. At t-1. 22.94) 0.74% and 2.36 (0.48 (1.85% successively.10) Acquired T-2 2.04) 1.21 (58.64% for deposits.11) 2.15 (20.05) 1.91 (22. The figures show a clear difference in the performance of banks in the two categories. and 19. 0.96) 72.00%. The growth rates of acquires are much higher than those of targets.90 (0. shown by the standard deviation of these measures.11) -0.08% for assets.395 million.31 (13.34 (0.98 (11.85 (0.Issue 15 (2011) Table 1: The number of mergers in every year Year 1994 1995 1997 1998 1999 2000 2001 2002 Total Number of Merger Operations 2 1 5 3 3 3 2 5 25 13 Table 1 presents the number of mergers per year. 3. For instance.69) 4.91 (1. acquiring banks cost-to-income ratio and staff cost-to-average asset ratio were 68.38) 2.98) 0.74) 3.34 (3.77 (23. and 2.25) 1. and -7.38% for loans.10) T-1 14.40) 1.77% for acquired banks.60) 96.84) 1.91 (22.34% for deposits.23% for the latter.61 (2.58%.96 (0.

14 Table 2: AE Middle Eastern Finance and Economics . The presented figures show the following.37) (42.01% for acquired banks.25%. Turning to COST ratio.73%.41 (34. which proves the significant difference in cost control between the two categories of banks. which show that the latter are much dispersed in terms of profitability.59) 218.16 1.38 27.45% for acquired banks.54 (0. the four previous ratios show that bidder have higher profitability that their targets.2%) than for targets (0. The financial ratios are in percentages.84 0.21 Deposit growth (40. compared to -1% for targets. Besides. The acquiring banks’ (average) sector-adjusted ROE is -3.28) 6.11 36.58) 0.25) 0.19) (0.75 EQUITY (3. and 41.394.52% and is significant at the 5% level.84) (93.65% for target banks.77 0.91 (0. Columns 5 and 7 show the percentage of banks with measures above the sector mean.57 (84.89 45.20) (0.34 (30. which proves that acquires have a much higher pricing power than their targets.22) 0.31 7. due to large difference in size (as shown in the last raw of Table 2).55) Market Share – 3.50 (0. The average sector-adjusted ROA of acquires is -0.84 20.09 (53.28) 33.80 (0. These were included to find out the proportion of banks that outperformed the sector in each of the two categories.88) is not statistically significant though.83 0.77) (0.25 (59.37) (3.88 3.75) (2.91 (0.08 (30. in assets).82 (27.37 7.49 3. whereas the productive efficiency measures score of 1) are scores (with a maximum 6.14) (51. among them only 14% reported ROE above the sector mean.21) (19.82) (49.61 3.17) 14. STAFF is lower for acquires (0. with a standard deviation of 0.77 146. (14% above sector mean). The difference is significant at 5%. Comparing the Performance of Merged Banks The performance of acquiring and acquired banks is compared in Table 3.60) (1.70) (2.37 Loan growth (39.62) 32.61) 33.79) 24. with 44% outperformed the market. Nevertheless.82) -3.66 CE (0.54 (0.48 22.51) (43.028.08) -7.65 Asset growth (26.71) (2.19) 0.76) (34.1.139. despite the fact .49 Assets (2.92%).68 (0. The last column shows the differences of sector-adjusted measures with their significance.99) (2.Issue 15 (2011) Development of acquiring and acquired banks performance measures .16) (35.71 0.79 0.81) 14.59) 175.45) (34.12% (36% above sector mean).162.25) (0.22) 8.25 CREDIT (13. compared to an ROE of -20.continied 0.91 Assets ($ millions) (1.66 25. whereas columns 4 and 6 contain the sector-adjusted figures.93%.64 19.25) (0. Acquiring banks (sector-adjusted) NIM is 0.01 19.56 (23.98 22.67) (201. The difference in AU (-0.90% compared to 0.27 15. The negative sign could be due to that fact that target banks are much smaller in size (i. The difference in ROE between the two groups of banks is 16.63) 30.19) (0.10) 15.77) (0.79 (225.69 3.67 (237. This difference between the two groups (0.92) (3.47) 0.11%.50 (0.34) 0.70 0.42 3.e.36% for acquired banks with a standard deviation of 2.274. this difference in cost was not translated into significant difference in productive efficiency (even CE).16) (15. rather than to higher revenues.97) (36.37) (15.57) 968.86 0.48 Deposits (2.04) 0. the standard deviation of acquires’ ROE is 14.76) 0.77 0. and 50.29) 1. Empirical Results 6.77 (0.93) Market Share – 3. The differences in the two ratios are significant at the 1% level.57) 0. Overall.27) 0.08) (1.17 (6. Similarly.52) (23.16) (0.60) Notes: Standard deviation in parentheses.31 34.58 (39.53 14.41%.47) is also not statistically significant. Columns 2 and 3 contain the “raw” figures (bank means). we observe that the average sector-adjusted cost-to-income ratio for acquires is 7.94 1.03) 29.

The acquired banks show a very high credit risk profile with doubtful loan provisions equal to 23.40 (28.04 (33.78 (0.08 85 (0.98 0.73 (19.19 76 (38.69) 25.09) 0.12 (0.84) 1.93 104.88 -0.83 (12. Overall. growth.80 56 (3.09) -6.92 (0.33 (1. This gives supported to the concept that (in general) more efficient banks target banks with poor performance.32 (35.27) 14. and loans) show that acquiring banks grew at faster rates than their targets.47 32 (70.92) 23.27 (21.47) 0.20) (0.93 (14.41) 4.00 36 (4. cost control. in terms of assets.11) 41. We also note that bidders are more dispersed in terms of size.18 (29. nevertheless.32* 7.22) (0.95 56 (39.03 (0.53 (0. Finally.40) 0.12 (0.77 0. pricing power.21) 0. bidders reported a sectoradjusted CREDIT of 0.10) 0.78) 33.47 0.64** 21.02 48 (58.06) 23.94 -22. Table 3: Comparison of acquiring and acquired banks performance measures Bank Means Acquiring Acquired 16.37) (56. Acquiring banks reported a sector-adjusted EQUITY of 0.97 (0.91 0.97) 0. deposits. On the other hand.79 (0.15) 70.05 0.12 (0.92 63 (1. the results reported in Table 2 show clear differences between acquiring and acquired banks in terms of profitability.90) 7.49) % positive 14 14 59 41 90 82 74 80 80 50 63 21 21 29 .20 (0.50) Sector-adjusted Means % positive Acquired -20.72*** -0.19) 0.05) (38.48) -4.42 9.08 77 (0.43) 0.82 18. The three growth measures (assets.47 (13. which shows that acquirers have a much better credit risk profile.52** 0.Middle Eastern Finance and Economics .26) -2.78%.18) (49.23 -1.22) (3.83 0.01) -1.87) 9.83%.02 4.67) (30. This may show that not all banks engaged in takeovers were with superior performance. which is shown by their higher standard deviations. with the majority of those banks (63%) had a ratio worse than the sector mean.18 2.36 52 (2.20 4. with only 32% of them above sector mean.25 (0.54) (40.70) (71.65 68 (59.01 2.18) Diff.76 (39.24) 0.93) 1.64) 0.16) 0.93) 3. which shows that bidders are – on average – much larger than their targets.26) 0.58 35.18 1. the difference in market share measures (assets and deposits) is significant at 1%.63 12.10) 0.10) (0. We also notice that the majority of acquiring banks (76%) grew at faster rates than the entire sector. The difference is statistically insignificant.12) (58.47% of total loans. the difference is significant (at 10%) only for assets.73) (4.73) -12. This may suggest that some banks acquired smaller (but more efficient) ones to benefit from their skills and/or market share.62** 33.28) 7. All growth measures show a difference between the two groups.66) -0.14 (27.69) 0.34) 0.Issue 15 (2011) 15 that the proportion of acquiring banks that outperformed the entire banking sector is higher than that of acquired banks.13 85 (0.78 (3. and market share. In fact.91 ROE ROA AU NIM COST STAFF TE AE CE EQUITY CREDIT Asset growth Deposit growth Loan growth Acquiring -3.15%.38 (3.91) (2. whereas acquired banks reported -2. assuming that they have better ability to run their assets. credit risk.47) 0.45 44 (50.15 64 (31.41 (14.41) -0. 16. The difference between the two groups is significant at the 5% level.01 12.99) (2.10) 0.04 -0.61 (1. it has been observed that some of them had even a poorer performance than their targets.76) -13.12 (0.92*** -0.

16) 0.05 0.94 2. In contrast. Columns 5 and 7 show the percentage of banks with measures above the sector means.98) (0.86 (16.92 (0.27) 1.10 41 63 (17.32 (1.92) 69.08) (0.86) (1. * Significantly different from zero at the 10% level.17 0.04 1.continued 3.60 (2.09) 0.43% to 6.14 48.23 -0.51 (0.14 18.74) 3. Looking at the changes in performance measures.86 0. *** Significantly different from zero at the 1% level.00 -0.54 -0.13) (130.09 0.05 -0.10 0.97 14.98) 3. Moreover.33 (0. 13.33) (36.11 -16.26) 29.96) -0.17) -1.09 76 67 (0.69) 3.01 4.94 3.20 10.28) (17.12) 2.12 0.02 50 63 (0.and post-merger raw figures (bank means).38) 0.33) Diff.98) 0.82) (0. The financial ratios are in percentages.11) 5.05) 0. we observe the following.06) 0.61 (8.05 65 75 (1.05 71 93 (0.74) -0. The last three profitability measures (ROA.2.14 0.89 (0.52 30 50 (1.11 0.14) (0.15 0.16) (0. AU and NIM have slightly increased.10*** Market Share – Assets Market Share – 3.5 ROE ROA AU NIM COST STAFF TE AE CE EQUITY CREDIT Asset growth .02) 15.28 (18.59% following the merger.21) (130.Issue 15 (2011) Comparison of acquiring and acquired banks performance measures .81 0.86) (53. Sector-adjusted ROE has witnessed a significant improvement (at 1%) from -6.60 16. Columns 2 and 3 contain the pre.13 -19. compared to 50% only pre-merger.98) (0.43 -0.65) (18. Table 4: Changes of performance measures post-merger Bank Means Pre-merger Post-merger 14.45 29.33) (0.00) 2.13) Sector-adjusted Means Pre-merger % positive Post-merger % positive -6.50 (0.05 6. maybe because the increase in the size of merged banks was not accompanied with similar increase in revenues and profits.85 (0.12 81 73 (0.35 57 46 (8.90) 1.05) (1.23*** Deposits Notes: Standard deviation in parentheses.43 55 54 (31. The Changes in Performance Associated with Mergers The effect of acquisitions on bank operational performance is presented in Table 4.15 (0.94 0.02* -0.00 (29.41** 3. 6.58) 0.16 Table 3: Middle Eastern Finance and Economics .43 6. ROA has witnessed a (insignificant) decrease.06) (1.23 0. AU and NIM) show that the majority of merged entities slightly outperformed the entire banking sector post-merger.65) -0.84) (54.40) (3.07) (0.80) 0.71) (0.42) (3.17) (0.05 55 65 (0.56) 0.96) 0. ** Significantly different from zero at the 5% level. 63% of merged entities outperformed the sector post-merger.96 (0.71 0. The last column shows the differences of sector-adjusted measures with their significance.57) 3. Columns 4 and 6 present the sectoradjusted measures.53 61 71 (21.16 0.59 50 63 (19.80 (26.78 (2.12) (36.12 (0. whereas the productive efficiency measures are scores (with a maximum score of 1) % positive is the proportion of banks with measures above sector mean.

04 (23. We do observe a decrease by 19. This suggests that larger and more efficient banks target small and underperforming banks.12%. This adds some support to the efficient management hypothesis. .85) 4. All growth measures report an increase post-merger. and capitalisation is insignificant.82) -0.57) 26. 65% of them recorded a measure above sector mean following the merger. more profitable. we observed some deterioration in productive efficiency (allocative and cost). This may suggest that the observed increase in profitability was the result of a more risky behaviour adopted by the merged entities. Nevertheless. where 25 bank merger operations occurred between 1994 and 2002. * Significantly different from zero at the 10% level. Our empirical results show significant differences in performance between the two groups of banks.33) 12. The financial ratios are in percentages. the acquirers have been larger in terms of assets (and market share).24 (34. 7. we have found that – on average – the merger operations do not add significant value to the acquiring banks.47) 3.61) 5.19 7. or maybe a result of the absorption of the high risk loan portfolios of acquired banks.77 (29. The sector-adjusted equity-to-asset ratio increased from -1. Conclusion We have examined the bank mergers experience in Lebanon.Middle Eastern Finance and Economics . This was also accompanied with a increase in credit risk by 10. the post-merger formed entity witnesses an overall fall in productive efficiency. On the other hand.Issue 15 (2011) Table 4: Changes of performance measures post-merger . and have better capability in managing their credit risk.continued 29. by comparing the performance measures of merged banks before and following the acquisition.54% in the sector-adjusted COST and a decrease in STAFF by 0.54 (2. the percentage of banks above sector mean decreased from 57% to 46%.61 (2. Finally.23% to -0.93* 0. The efficiency of merged entities shown by financial ratios has not improved considerably. we observe a significant increase in the market share of entity formed after the merger.33 (26. Therefore.13) 4.16 (15. We finally noticed an increase in growth and market share.93** Market Share – 0.35%. which reflects a worsening in the risk profile of merged entities. but this improvement is not significant in most of the used measures. The study was divided into two parts. which implies deterioration in productive efficiency. AE and CE measures show some decline. In the second part. but only the growth rate of loans is significant (at the 10% level) with the majority of those banks grew faster than the entire sector.82) 28.57) 65 52 13.70) 75 58 17 Deposit growth Loan growth Market Share – Assets 14. The capitalisations of acquiring banks slightly improved post-merger. For instance. but both are statistically insignificant. in order to detect the differences between merged banks. using the operational performance method. more efficient. and considerable increase in credit risk.10 (19.96 (78. we have compared the characteristics of acquiring and acquired banks. Also in this context.41% (significant at the 5% level). the improvement in profitability.53 (2. ** Significantly different from zero at the 5% level.72* Deposits Notes: Standard deviation in parentheses. In the first part.81 (2. In general.53) 3.18) -2. efficiency. Secondly. we have detected the changes in operational performance associated with these bank mergers.88 (28. We do observe some improvement. which states that underperforming firms are usually taken-over by more efficient ones. On the other hand. whereas the productive efficiency measures are scores (with a maximum score of 1) % positive is the proportion of banks with measures above sector mean. we observe that while 55% of merged entities had STAFF above sector mean.

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