Comparison of Models in the Identification of Patterns for

Mergers and Acquisitions (M&A) in Financial Institutions

Abstract
Considered as a form of activity that can provide market participants with cor-
porate control and gaining business power, mergers and acquisitions (M&A) opera-
tions are still a subject of constant discussion and disagreement among profession-
als, governments and society. Part of the discussions, mainly in the market and
among the theoreticians, is about the possibility of predicting these events. There-
fore, the present paper has the objective of comparing four prediction techniques
in the identification of patterns of occurrence in M&A processes in Brazilian finan-
cial institutions, with as discriminant analysis (DA), logistic regression (LR), artificial
neural networks (ANN) and a hybrid model. The data used in this work are between
1995 and 2015, and were obtained by the database of Economática, the Central
Bank of Brazil, IPEADATA and KPMG. The results indicated that the economic-finan-
cial characteristics of the firm and the market and economic characteristics are de-
cisive for the occurrence of this strategies. It is emphasized that the results found
by the neural networks were more assertive than the other methodologies used
and that the results were, for the most part, consistent with the theory and initial
expectations. Finally, the importance and relevance of the results are highlighted,
given the contribution potential with the scarce M&A literature in emerging mar-
kets and the current debate about the concentration in the banking sector and its
effects on the returns of the acquiring banks.

Key words: Mergers and Acquisitions; Neural Networks; Discriminant Analysis;

Logistic Regression..

Resumen
Considerada una forma de actividad que puede proporcionar a los participantes
del mercado el control corporativo y la ganancia de poder de negocio, las opera-
ciones de fusiones y adquisiciones (F&A) siguen siendo un tema de constantes dis-
cusiones y divergencias entre profesionales, gobiernos y sociedad. Parte de las dis-
cusiones, principalmente en el mercado y entre los teóricos, es sobre la posibilidad
de previsión de esos acontecimientos. Por lo tanto, la presente investigación tiene
por objetivo la comparación entre cuatro técnicas de previsión en la identificación
de patrones de ocurrencia en los procesos de F&A en las instituciones financieras
brasileñas, siendo ellas el análisis descriminante (DL), regresión logística (LR), redes
neuronales artificiales (ANN) y un modelo híbrido. Los datos utilizados en el tran-
scurso del trabajo se comprenden entre los años 1995 y 2015, y se obtuvieron a
través de la base de datos de Economática, del Banco Central del Brazil, del IPEA-
 DATA y de la KPMG. Los resultados indicaron que las características económico-fi-
nancieras de la firma y las características de mercado y económicas son decisivas
para la ocurrencia de tales estrategias. Se resalta que los resultados encontrados
por las redes neuronales fueron más asertivos que las demás metodologías em-
pleadas y que los resultados fueron, en su mayoría, coherentes con la teoría y con
las expectativas iniciales. Por último, se resalta la importancia y la relevancia de los
resultados encontrados, dado el potencial de contribución con la escasa literatura
sobre F&A en mercados emergentes y para el actual debate acerca de la concen-
tración en el sector bancario y de sus efectos sobre los retornos de los bancos
adquirente.
Palabras clave: Fusión y Adquisición; Redes Neurales; Análisis Discriminante; Regre-
sión Logística..

1. Introduction
The global economy has gone by several transformations that intensify the econ-
omy every day. All economic actors are subject to the consequences of these transfor-
mations that have a direct impact on the business environment, whether in times of
ascension or economic recession. These transformations in the national economy
helped to expand the number of merger and acquisition transactions (M&A) (Sherman
2018). National and foreign companies see in these operations opportunities for
growth, in addition, these operations can be considered as a result of the company’s
strategies (Öberg & Holtström 2006).
Besides to the economic representativeness, the theme is directly related to the
transformations in the business environment in Brazil that occurred since the 1990s,
where a reconfiguration of the institutional system was observed, based on the struc-
tural changes caused by the economic policy aimed at the State and the opening of the
economy abroad. This fact provided the investor with the security required to make in-
vestments in the country and allowing the national entrepreneur the stimulus neces-
sary for operations across borders.
Considered a form of activity that can provide market participants with corporate
control and gain market power, M&A operations are still a subject of constant discus-
sion and disagreements among professionals, governments and society. Part of the dis-
cussions, mainly in the market and among the theoreticians, is about the possibility of
predicting these events.
Companies are looking forward to increasing their market share each day, as well
as gaining space in new markets, to increase their profitability. Thus M&A’s operations
become a matter of concern to the local government, due to the changes they bring to
market concentration, which may result in losses to consumers and local industry. Be -
sides, these operations alter the internal structure of the firms and, in this way, pre -
dicting these operations can help companies to prepare for transactions or, even, pre-
vent themselves from being targeted (Camerlynk, Ooghe & Langhe 2005; Kupper
2002).
Considering the volume of M&A transactions involving Brazilian companies in the
banking sector (Bergmann et al. 2015) and the importance of these strategy of growth
in companies’ results, it is relevant to study and analyze the existence patterns of these
 3

processes and develop forecasting methodologies based on variables that express the
firm’s general economic and financial characteristics and which are capable of influenc-
ing the occurrence of the merger and/or acquisition process.
Therefore, the main objective of this work is to compare models for predicting pat-
terns of occurrence of mergers and acquisitions operations in Brazilian financial institu-
tions through discriminant analysis (DL), logistic regression (LR), artificial neural net-
works (ANN) and model hybrid. Specifically, it is intended to identify and evaluate how
firm, market and economic characteristics, from the perspective of the acquiring insti-
tution, influence the moment the M&A strategy is carried out.
The relevance of the topic is highlighted, given the progress made in the consolida-
tion of the Brazilian banking industry observed in recent years (Metzner & Matias,
2015). There are, however, steps to be taken. Thus, the present work intends to con -
tribute to the scarce literature on M&A in emerging markets and to the current debate
about concentration in the banking sector by empirically testing the theories already
developed and promoting a level for new research.

2. Theoretical Reference
2.1. Studies of M&A operations
There is extensive literature on F & A operations where each author seeks to ex-
plore a focus on these complex operations in an attempt to explain what makes F & A a
success or failure. However, Bower (2001) argues that, despite all empirical research,
the academic community has not yet come to a coherent answer on this question. As
can be seen in Table 1, the objectives of F & A work are diverse, but most of them seek
to assess the financial impacts of these operations.
Wood Júnior, Vasconcelos and Caldas (2004) affirm that the process of economic
liberalization in Brazil since the 1990s was what boosted the growth of M & A opera -
tions, and that, as in many emerging countries, these follow growth the country. Ac-
cording to the authors, economic liberalization favored F & A processes in different
ways: first, the deregulation of local markets, associated with international trends to-
wards globalization, allowed foreign companies to acquire Brazilian companies; sec-
ond, privatization programs created opportunities for many foreign and Brazilian com-
panies to acquire large operations in the energy, telecommunications and banking sec-
tors; and third, high international competition, coupled with accelerating technological
change, forced domestic firms to merge or to acquire one another.

Table 1: Important M & A studies.

Authors Methodolog Goals Conclusions

y

Adelaja, Logistic Identify what drives The authors concluded that the
Nayga e Regression companies to target M&A. company's liquidity, profitability,
Farooq leverage and the dividends generated are
 (1999) characteristics that can determine an
M&A target.

Rossi e Mutiple Determinants of cross-border They identified that the protection of the
Volpin Regression M&A in the world. domestic investor is decisive for these
(2004) operations.

Andrade e Multiple Identify the economic role of The authors concluded that M&A
Stafford Regression M&A in the restructuring of operations play a dual economic role,
(2004) and Logistic industry and companies. that is, they can be used to increase the
regression company's capital and facilitate the
narrowing of the market.

Changqi e Multiple Identify the determinants of It was identified that the performance of
Ningling Regression crossborder M&A operations companies before the M&A is essential
(2010) in China. for the event of the same.

Andreou, Abnormal Identify whether M&A They concluded that M&A operations
Louca e Return generate synergy gains. generate synergy gains and that the
Panayides acquirers achieve good results with
(CAR)
(2012) abnormal returns.

Merkert e DEA Identify whether M&A are The results generated by M&A do not
Morrell used as a means of growth benefit the gains with economies of scale
(2012) and survival in the airline and the financial results can not be
market. observed in the short term.

Duchin e Buy and hold How are M&A operations They concluded that the M&A
Schmidt abnormal re- during the waves of these operations that occur during the waves of
(2013) turns (BHAR) activities. these activities present results that are
lower than expected. They point out that
corporate governance is weak in these
periods and therefore can be influenced
by agency problems.

Source: Santos (2013).

In this way, the market in which the companies are allocated becomes relevant in
the execution of the operation. Tirole (2006) further notes that just as investment deci-
sions are strategic given the degree of risk that each one has, M&A operations can
 5

pose high risk if they are not well planned. And, the author still mentions that the pres-
ence of potential buyers in the market helps the company in making this strategic deci -
sion.

2.2 Determinants of F & A operations

M&A operations influence the value of companies and, consequently, a large part
of the gains from these operations turn to the shareholders of the target companies.
Thus, the possibility of identifying the occurrence of these operations is attractive to
companies and investors, as they may use differentiated information in decision mak-
ing. The possibility of abnormal gains from relevant information is a subject highly dis-
cussed in finance theory (Bruni, Famá, 1998).
Camerlynck, Ooghe and Langhe (2005) argue that the great majority of studies on
M&A forecasts evaluate companies' pre- and post-acquisition performance. The au-
thors state that, based on the possible change in the profitability of the company, it is
possible to characterize the company as a target or acquirer. In addition, the work on
the subject also seeks to verify if the justifications used for the F & A event were
reached.
Rodrigues and Stevenson (2013) state that M&A operations can be predicted using
published financial data, and that factors such as inefficient management and incom-
patibility of growth resources also influence the announcement of an M & A transac-
tion. According to Camerlynck, Ooghe and Langhe (2005), the main models of F & A
prediction are measures of profitability and leverage of target companies. For the au-
thors, one of the reasons that classify companies as a target is the fact that the M&A
operation is the only alternative to bankruptcy because of financial difficulties in the
period before the event. Thus, the profitability and leverage of the company become
relevant to identify the possibilities of the event occurring.
Bauguess et al. (2009) and Moeller, Schlingemann and Stulz (2005) corroborate
with the authors Camerlynck, Ooghe and Langhe (2005) when they affirm that compa-
nies within their industrial group with low book value may be the target of such opera-
tions. And, Ling and Petrova (2011) argue that companies facing financial difficulties
are more likely to become targets for F & A operations. However, Camerlynck, Ooghe
and Langhe (2005) argue that target companies will not necessarily perform poorly,
after all, if the M&A option is strategic, the target company can be profitable.
(GAUGHAN, 2011).
Thus, assessing the performance of M&A operations becomes essential. With the
evaluation of profitability, liquidity and solvency, it is possible to identify a behavior in
relation to M & A operations. After all, these indicators have changed since the an-
nouncement of M & A operations, and may have different effects on companies
(Camerlynck, Ooghe and Langhe, 2005).

Table 2: Prediction studies and their methodologies.

Researchers Country Methodology / Method

Simkovitz e Monroe (1971) USA Multiple Discriminant Analysis

Tzoannos e Samuels (1972) United Mínimos Quadrados Generaliza-
Kingdom dos
 Stevens (1973) USA Multiple Discriminant Analysis
Belkaoui (1978) Canada Multiple Discriminant Analysis
Wansley e Lane (1983) USA Multiple Discriminant Analysis
Dietrich e Sorensen (1984) USA Regressão Logística
Rege (1984) Canada Multiple Discriminant Analysis
Bartley e Boardman (1986) USA Multiple Discriminant Analysis
Palepu (1986) USA Multiple Regression and Logistic
regression
Bartley e Boardman (1990) USA Multiple Discriminant Analysis
Ambrose (1990) USA Logistic regression
Ambrose e Megginson (1992) USA Logistic regression
Barnes (1998) United Multiple Discriminant Analysis
Kingdom
Barnes (1999) United Logistic regression
Kingdom
Walter (2004) USA Logistic regression
Camerlynck, Ooghe e Langhe Belgium Medium
(2005)
Brar, Giamouridis e Liodakis Europe Logistic regression
(2009)
Clements e Singh (2011) USA Autoregressive Model

Fonte: Adaptado de Barnes (1998).

Officer, Poulsen, and Stegemoller (2009) argue that M & A announcements gener-
ate abnormal positive returns for shareholders and that informational asymmetry
about the target company increases buyer returns. In the meantime, the forecasts of F
& A operations can become an object of arbitrage and abnormal gains to investors. For
this reason, forecasting methods are being discussed. Pessanha (2006) reviewed the
work published with the topic and concluded that the most used methods for at-
tempting to forecast these operations are discriminant analysis, logistic regression and
artificial neural networks. Table 2 shows the forecasts of mergers and acquisitions, the
country in which they were carried out and the respective methodologies.

3. Methodology
3.1. Data
The data of this work were obtained from Economática, Central Bank of Brazil, In-
stitute of Applied Economic Research - IPEADATA and KPMG. The period under review
 7

ranged from the first quarter of 1995 to the second quarter of 2015. The relevance and
importance of the period is emphasized since it comprises the years after the imple-
mentation of the Real Plan and, in addition, the restructuring and various changes pro-
moted in the National Financial System. The statistical packages chosen to analyze this
work were the Statistical Package for Social Science (SPSS) and R.
The data were organized as an unbalanced panel. Therefore, it is relevant to in -
clude in the modeling process the unobserved effects from the organizations studied
or the effects of specific times. In the literature, there are several ways of treating the
problem of heterogeneity not observed, however, it was chosen to follow the method-
ology adopted by Longhi et al. (2005). The authors suggest that the specific effects be
captured by means of a variable defined between the values 0 and 1.
Thus, two variables were included in the models, where the first one refers to the
effects of the specificities of the organizations, calculated by equation (1) and the sec-
ond variable was inserted in order to capture the effects of the specificities of the peri-
ods that make up the time horizon studied (1995 to 2015), calculated from equation
(2),

(1)

where EEIF = specific effects of financial institutions; i ranges from 1 to N and N =

sample size in cross section and,

(2)

where EET = specific time effects; t ranges from 1 to T and T = sample size
at temporal cut.

3.2. Formulation of the Hypotheses and Operational definition of the

Variables
The literature on mergers and acquisitions is extensive, however, there is no con-
sensus on the determinants of occurrence of these strategies. Considering that the
main objective of this work is to identify and evaluate the patterns of occurrence of
M&A strategies of Brazilian financial institutions, the empirical development was based
on the following structure: to determine, from the point of view of acquiring institu-
tions, which independent variables are responsible for most of the differences be-
tween the two groups of periods surveyed (those with M&A and those who do not
have M&A) and, consequently, develop, by the proposed methodologies, a classifica-
tion model of these periods in one of two groups.
The dependent variable of these models will be represented by a dummy variable
that will assume value 0 (zero) for the periods in which M&A strategies were not ob -
served and 1 (one) for the periods in which such strategies were observed. The inde-
pendent variables used fall into three categories: firm, market and economic charac-
teristics. The variables related to the characteristics of the firm were defined based on
the works developed by Barnes (1998, 1999), Bauguess et al. (2009), Brar, Giamouridis
& Liodakis (2009), Camargos & Barbosa (2003), Deni, Mihajlov & Radovi (2006), Franco
& Camargos (2011) and Palepu (1986).
The indicators used in this research follow the structure of the Chart of Accounts -
COSIF. And adaptations were made to these indicators, to adapt them to the banking
system and also because of the level of accounting accounts disclosed by BACEN.
Thirty-six general, financial, economic and accounting indicators were used, which
were divided into six dimensions, as presented in Frame 1 in annex, together with their
hypotheses formulated and expected signs. Frame 2, also in annex, presents the vari-
ables used for market and economic characteristics and their hypotheses formulated
and expected signs.
The M&A strategies studied are presented in Frame 3 (annex). Hypothetically, it is
believed that such variables can define the moments of M&A. It is important to em -
phasize that in the presented models, not all the determinants of the dependent vari-
ables are expressed, and yes, the model presents the main factors found in the litera-
ture.

3.3. Models for Data Analysis

2.3.1. Linear Discriminant Analysis

According to Mingoti (2005), discriminant analysis (DA) is a technique that can be

applied to the classification of sampling or population elements, but differs from the
method of cluster analysis because, for its use, groups for which each sample element
can be classified are previously defined, i.e., known a priori in terms of their general
characteristics.
Following Hair Junior et al. (2009), discriminant analysis involves the determination
of a statistical variable and the combination of two or more independent variables that
discriminate best among the predefined groups. The discrimination is obtained by es-
tablishing the weights of the statistical variable for each variable, to maximize the vari-
ance between groups relative to the variance within the groups, generating a discrimi-
nant function. The result of this combination produces the discriminant function, ac-
cording to equation (3),

Zjk = α + W1X1k + W2X2k + W3X3k + ... + WnXnk, (3)

where Zjk : discriminant Z-score discriminant function j for object k; α the intercept;
Wi: discriminant weight for the independent variable i and Xik: independent variable i
for object k.

2.3.2. Logistic Regression

Hair Junior et al. (2009) state that the Logistic Regression (LR) methodology repre-
sents a specialized regression format whose purpose is to predict and explain a binary
or qualitative categorical variable that in this work is represented by the adoption or
non-adoption of M&A by the acquiring institutions. This variable assumes the value 0
(zero) for the non-adoption of M&A strategies and 1 for the occurrence of M&A.
 9

For Field (2009), logistic regression can be briefly defined as a multiple regression
with dichotomous categorical output variable and continuous or categorical predictive
variables. According to Stock & Watson (2004), the logit model can be represented by
equations (4) and (5),

Pi(Y = 1|X1,X2,...,Xk) = F(β0 + β1X1 + ... + βkXk), (

4
)

, (5)
where Pi is the probability that a company will have merger and acquisition
and β the parameters to be estimated and the basis of natural logarithms.
Against to the multiple linear regression, logistic regression does not use the ordi-
nary least squares method in adjusting its parameters. Due to the nonlinear nature of
the logistic transformation, the coefficients of the logit model are estimated by maxi -
mum likelihood. Thus, the probability that the studied organization has not undergone
M&A operations is expressed by equation (6).

. (6)
The odds ratio is given by equation (7).

. (7)
Logarithmizing the expression, we have equation (8).

. (8)
According to Santos (2013), to estimate the regression model it is necessary to per -
form tests to verify the presence of multicollinearity and autocorrelation between the
residues. Pearson’s correlation test is one of those responsible for evaluating the pres -
ence of multicollinearity, however, Alisson (2003) states that examining the correlation
matrix is not sufficient to identify multicollinearity problems. Therefore, Hair Junior et
al. (2009) suggest that the variance inflation factor (VIF) is examined. For authors, VIF
values above 10 may indicate serious multicollinearity problems.

2.3.3. Artificial Neural Networks (ANNs)

Following Gonçalves et al. (2006), artificial neural networks (ANNs) have been suc-
cessfully employed in several areas of knowledge, such as industry, business, finance,
medicine, etc., mainly in problems of classification, prediction and recognition of be-
havior patterns. According to the authors, the reason for the great use of the method-
ology is related to the fact that an ANNs composed of one or more hidden layers, with
an adequate number of neurons, can approach practically any continuous nonlinear
function, in a given interval.
As for network architecture, Castro Júnior (2003) emphasizes the importance of se-
lection and states that ANNs are divided into two large groups, feed-forward networks
and feed-backward networks, and that the difference between the two methods is in
the form which knots intertwine. Feed-backward networks have only one layer of neu -
rons and all are interconnected; since the feed-forward networks have several horizon-
tally arranged layers and each neuron connects and sends information to the back lay-
ers and the neurons of the same layer are not interconnected with each other.
Among the different types of RNA, we have chosen to apply feed-forward as the
most used for prediction of this nature (Zhang 2003). Moreover, this algorithm
presents greater ease in the implementation and good capacity of generalizations. The
networks constructed during the data processing consist of an input layer, an interme-
diate layer and an output layer (prediction).
The option to use artificial neural networks (ANNs) was due to the low utilization of
the same in the study and forecast of mergers and acquisitions. When the scope of
analysis is limited to financial institutions in emerging countries, studies are even rarer.
And, according to Ansuj et al. (1996), modeling with the use of ANNs is one of the tech -
niques for forecasting that has been successfully used and demonstrating superiority
over several other models in several areas of knowledge.

3. Results
3.1. Patterns of Occurrence of the Periods in which M&Aoccur
Before starting the modeling process, it is important to verify the assumptions in-
herent to each statistical technique employed. As for the discriminant analysis, Favero
et al. (2009) and Hair Junior et al. (2009) assert that when adjusting discriminant mod -
els the following main conditions must be observed: i) normality of the explanatory
variables and ii) absence of multicollinearity problems of the explanatory variables.
Initially, the variables were analyzed in order to verify the normality of the indepen -
dent variables, and Kolmogorov-Smirnov and Shapiro-Wilk tests were performed. As-
suming a probability of error of 5% (α = 0.05), the results of the tests indicated that the
variables C1, C2, E4, E6, L3, L4, G1, G2, ATCR, DPCR, OCHH, PLHH, PIB are not normally
distributed and to respect the assumptions of the DL model, we excluded these vari-
ables from the analysis.
Then, to respect the assumption of the absence of multicollinearity between the in-
dependent variables, the collinearity test was performed using the Variance Inflation
Factor (VIF) for the variables that presented normal distribution, which values greater
than 10 are strong indication of which there is problem multicilonearity present be -
tween the variables. According to the calculated VIF factor, we observed that the vari -
ables A5, E9, L5 and PLCR obtained values higher than 10. Thus, these variables were
eliminated and the new calculated results were presented within the values critics pre -
sented by the VIF criterion.
 11

Table 1 shows the means and standard deviations of the independent variables that
compose the study. The statistics are presented for the moments in which M&A opera-
tions were not observed (dependent variable assumes zero value), for the periods in
which M&A strategies were observed (dependent variable assumes value 1) and the
values for the whole database (total).

With regard to the variables related to the macroeconomic scenario, it can be af-
firmed, from the measures presented in Table 1, that the variables Selic Rate and infla -
tion present a higher average in the periods in which the presence of M&A strategies
in the institutions purchasers. With respect to the exchange rate variable, the means
found are very similar. It is possible to notice a small difference in the mean in periods
when the dependent variable assumes value 0 (zero). As for the standard deviation of
these variables, we can observe more expressive values ??in the periods in which M&A
strategies are noted.

Regarding the variables that represent the market characteristics, it can be ob-
served that the stock volatility is higher in periods when the dummy variable assumes
value 1. A similar situation can be observed with the variable regulatory framework.
The variables market concentration (ATHH) and M&A in the sector presented different
behavior from the others, presenting a higher average in the periods in which M&A
strategies are not observed. With respect to the standard deviation, all the variables
(market characteristics) presented more expressive values for the moments in which
M&A are observed.

The variables related to firm characteristics, in the capital adequacy category, the
variables C3, C4 and C5 presented a small tendency of elevation in moments of M&A.
Thus, it can be stated that, in the moments of M&A, acquiring institutions have, on av-
erage, a better capital adequacy.

In the asset quality dimension, the variables A1, A2, A3 and A4 presented more ex-
pressive values in the periods in which M&A are observed. These behaviors were ex-
pected for variables A1 and A4 as they measure the quality of financial intermediation
income and the asset growth rate, respectively, and it is believed that the increase in
such indices would improve the bank’s financial health and increase the conditions for
expansions via M&A. A different situation is observed in variables A2 and A3, thus con -
tradicting the initial expectations, since it was expected that their mean would be
lower in the moments of occurrence of M&A, since a more conservative and prudent
posture regarding the risk of default would be to operate so that the most risky credit
operations represent the smallest portion of the total loan portfolio.
Table 1: Descriptive statistics of variables.
Mean Standard Desviation

M&A M&A

Period that there were no M&A: 0 (zero) Period that there were no M&A: 0 (zero)
Period of M&A: 1 (one) Period of M&A: 1 (one)

0 1 Total 0 1 Total

Regulation mark ,166667 ,250000 ,222222 ,408248 ,4522670 ,4277926

 3

Selic ,661921 1,174874 1,003890 ,103542 ,4157544 ,4206057

4

Echange 1,941365 1,889282 1,906643 ,188248 ,4333851 ,3641337

6

Inflation ,195000 ,637222 ,489815 ,482234 ,7024888 ,6585808

4

ATHH ,100681 ,079945 ,086857 ,010366 ,0180164 ,0185153

7

Return volatility ,002120 ,015812 ,006684 ,020472 ,0600353 ,0499953

6

C3 ,024270 ,025266 ,024934 ,030004 ,0231754 ,0247497

3

C4 ,024830 ,026067 ,025655 ,030320 ,0233751 ,0249860

5

C5 ,045091 ,055558 ,052069 ,005735 ,0106810 ,0104532

1

A1 ,025426 ,033584 ,030864 ,003066 ,0064926 ,0067602

3

A2 ,069921 ,081625 ,077724 ,031639 ,0255488 ,0273681

1

A3 ,003860 ,009678 ,007739 ,006860 ,0128052 ,0113095

0

A4 ,012974 ,029364 ,023901 ,025409 ,0359990 ,0330400

6

M1 ,381819 ,411420 ,401553 ,056103 ,0535038 ,0546281

0

M2 ,099638 ,032102 ,054614 ,042987 ,1007485 ,0904685

8

M3 ,828506 ,923506 ,891839 ,045395 ,1403992 ,1244364

2

M4 ,022500 ,038202 ,032968 ,026922 ,0360401 ,0333415

8

M5 -,001888 ,082807 ,054575 ,149934 ,1859913 ,1751663

2

M6 -,038647 ,015988 -,002224 ,093977 ,1120612 ,1068901

0

M7 ,018932 ,025264 ,023153 ,002561 ,0049231 ,0052007

9

E1 ,031397 ,034807 ,033670 ,003068 ,0062877 ,0055755

3

E2 ,002557 ,003284 ,003041 ,000255 ,0007538 ,0007149

2

E3 ,108815 ,122526 ,117956 ,015837 ,0133075 ,0152508

2

E5 ,003071 ,003717 ,003502 ,001028 ,0009786 ,0010144

4

E7 ,151910 ,129649 ,137069 ,024170 ,0407910 ,0369470

6

E8 ,146158 ,150975 ,147764 ,012584 ,0206957 ,0181434

7

E10 ,134241 ,156110 ,148820 ,018734 ,0162197 ,0196466

8

E11 ,079552 ,086542 ,084212 ,014696 ,0152473 ,0150150

6
 13

E12 ,006494 ,008320 ,007711 ,001120 ,0025930 ,0023461

7

L1 ,013124 ,014111 ,013453 ,001845 ,0043564 ,0036757

6

L2 ,598295 ,662937 ,641390 ,049379 ,0374538 ,0510692

4

M&A in sector 6,416667 6,000000 6,138889 ,861200 1,8027756 1,5368566

7

In the efficiency dimension, the only variable that presented the highest average in
the moments when M&A strategies are not observed was M2. This finding indicates
that, at times of M&A, the acquiring financial institutions have lower amounts of ad-
ministrative expenses, demonstrating greater efficiency in the management of finan-
cial intermediation assets of higher values. However, the variables M1, M6 and M7
have been higher in the periods preceding and occurring M&A. This situation indicates
management inefficiency, since high values for these variables indicate that, propor-
tionately, the institution has high administrative expenses (M1) and high operating ex-
penses (M6 and M7).
As for the profitability dimension, the only variable that presented the highest aver-
age in periods when M&A strategies are not verified was E7. This is consistent with the
efficiency indicators M6 and M7, since it indicates that the institutions have high oper -
ating expenses. The others (E1, E2, E3, E5, E8, E10, E11 and E12) presented more ex-
pressive values for the moments that the dependent variable assumes value 1. It can
be affirmed that, in periods that precede and that occur strategies of M&A on average,
institutions have higher values for profitability indices.
Finally, it is observed that the liquidity dimension represented by the variables L1
and L2 showed, on average, higher in the moments in which M&A strategies are
adopted by the acquiring institutions.
3.2. Analysis of Models
3.2.1. Fitted Discriminant Analysis

From Table 2, the eigenvalue, relative measure of how different the analyzed
groups, assigned to this function was 1,987, which corresponds to 100% of the ex-
plained variance, is presented for the analysis of the significance of the fitted DA
model. The canonical correlation, statistically derived from the degree of association
between the discriminant scores and the groups, was 0.816 which, squared, indicates
that approximately 66.59% of the dependent variable is explained by the independent
variables included in the model.
From Table 3 it can be seen that the Wilks lambda test presented the result of
0.335 and the chi-square was 15.868, with a significance lower than 1%, fact that al-
lows to infer that the discriminant function is highly significant.

Table 2: Quality of fit.

Eigenvalue % Variance Accumulated% Canonical Correlation

1,987 100,0 100,0 0,816

Table 3: Lambda of Wilks.

Wilks’ Lambda Chi-square df Si
g.

0,335 15,868 3 0,0

01

Table 4 presents the standardized and non-standardized coefficients of the discrim-

inant function for each of the independent variables included in the model. The stan-
dardized coefficients of the discriminant function are obtained by multiplying the non-
standard coefficients by the respective covariance roots. Thus, the discriminant func-
tion found is described in equation (10).

Z = −10,704 + 25,577A1 + 7,352L2 + 4,851M3 + 46,752E1 − 25,715E10 (9)

Table 5 shows the loads of the discriminant function found. The variables are ar-
ranged in order of importance for the discriminations of the studied periods. In gen-
eral, the signs found are consistent with the hypotheses initially formulated (HM3,
HE1, HL2, HA1) (Frame 1). It was expected that greater efficiency, profitability, liquidity
and asset quality would be decisive for the definition of the moment for the adoption
of M&A strategies. Although it does not have great discriminatory power, only the vari-
able E10 was not coherent with the preliminary formulations. The mentioned variable
presented an opposite direction with the moments that precede and the strategies of
M&A occur.
 15

Table 4: Standardized and non-standardized coefficients of discriminant function.

Standardized Non-standardized

A1 0,654 A1 25,5
77

L2 0,458 L2 7,3
52

M3 0,676 M3 4,8
51

E1 0,533 E1 46,7
52

E10 -0,909 E10 -

25,71
5

(Constant) - (Constant) -
10,70
4

This finding, besides to contradicting the hypothesis originally formulated (HE10), is

also inconsistent with other studies developed. Akhigbe, Madura & Whyte (2004), for
example, using the logistic regression methodology for 254 American banks between
1987 and 2001, concluded, among other things, that the probability of a bank acquir -
ing was greater for the most profitable ones. Pasiouras, Tanna & Gaganis (2011) using
the same methodology, investigated the determinants of the acquisitions in some Eu-
ropean countries and concluded, similarly to what occurred in the aforementioned
study, that acquiring banks are more profitable.

Table 5: Discriminant function loads.

Function Expected Sign Sign Found

M3 0,580 + +

E1 0,373 + +

L2 0,091 + +

A1 0,036 + +

E10 -0,379 + -

3.2.2. Fitted Logistic Regression

Regarding logistic regression, Hair et al. (2009) state that it is more flexible with re-
gard to the non-fulfillment of its assumptions when compared to the linear discrimi-
nant analysis, especially when it comes to the normality of the variables. For this rea-
son, we used the variables that did not have results greater than the value 10 in the
VIF test, i.e., we used only the variables that did not have multicollinearity.
The logistic regression (LR) technique was used for the financial institutions that
make up the study database. As for general statistics, the coefficient of determination
appropriate to the logit model, R2 of McFadden, show that the adjusted model explains
the relationship between the dependent and the independent variables at 21.23%. The
chi-square was 205,967 and presented a highly significant p-value. In other words, the
statistical method used to study the relationship between variables is adequate to cor -
rectly classify the period that the M&A operations occur.
The coefficients of the model obtained through logistic regression are shown in Ta-
ble 6.
Table 6: Coefficients estimated by logistic regression.
Dimensão Variables Estimated coefficient Signs found Expected signs

- Constant 33,6161***

Capital Adequacy C2 2,42908*** + -

C3 4,22151* + +

Efficiency M3 1,90046*** + +

Profitability E1 11,3404*** + +

E2 -12,4775*** - +

E4 18,1791** + +

E6 0,610522* + +

Liquidity L3 0,178396*** + +

L4 -2,10447*** - +

General G1 2,03768*** + +

Economic Selic -1,20887*** - -

Exchange 0,641487** + +

Market Regulation Mark -0,711788** - +

DPHH 4,8469** + -

From the results presented in Table 6 it is possible to infer that the variables that
make up the Capital Adequacy dimension, C2 and C3, were shown to be in part coher-
ent with the hypotheses originally formulated (HC2 and HC3). The C2 index measures
the impairment of the reference equity in relation to the immobilization of the asset
and, thus, an inverse relationship was expected between this index and the moments
that precede and the M&A strategies occur. However, the model presented a direct re-
lationship between the variables, contradicting the hypothesis HC2 and denoting that
the increase of the commitment of reference equity is directly related to the moments
 17

of M&A. This fact can be justified by the investment needed to implement a M&A
strategy and consequent increase in fixed assets.
The C3 index, on the other hand, measures the growth rate of adjusted sharehold-
ers’ equity (adjusted PL). Thus, it was expected that moments of growth of the ad-
justed PL directly influenced the occurrence of M&A strategies, an expectation that
could be confirmed with the adjusted model, thus confirming the hypothesis HC3.
In the Efficiency dimension, the positive relationship between the variable M3 and
the periods before and after M&A and confirmed the hypothesis HM3, revealing that
the increase in the proportion of services revenues and administrative expenses posi-
tively influences the occurrence of M&A.
About the Profitability dimension, it was expected to find a positive relationship in
all variables studied. This expectation was confirmed in most of the variables included
in the model, except for variable E2. The profitability of the asset (E2) was inversely re-
lated to the moments that precede and occur M&A, thus contradicting the hypothesis
HE2. Perhaps this finding can be justified by the capital commitment and investments
required for the operationalization of M&A strategies in which the return is not ob-
served in the short term and usually depends on the maturity level of the investment
being earned in the medium and long term.
Regarding the other variables (E1, E4 and E6), the initial expectations and hypothe -
ses (HE1, HE4, and HE6) were confirmed, revealing that increases in the profitability of
the PL, the net investment rate and the result of the main activity are directly related
to the period of M&A occurrence.
Regarding the Liquidity dimension, the variable L3 presented a sense of relationship
in relation to the dependent variable consistent with the hypothesis HL3. This finding
allows us to infer that increasing the ability to pay immediate liabilities with short-term
assets increases the probability of M&A strategies. Starting from the analysis of the
variable L4, it can be seen that the inverse direction expressed by the negative sign of
the coefficient refutes the hypothesis HL4 and reveals that the increase in the bank’s
capacity to honor its immediate commitments decreases the probability of occurrence
of M&A.
Finally, the variable G1 that integrates the general dimension showed a direct rela-
tionship with the probability of occurrence of M&A, demonstrating that the greater
size of the bank is positively related to the moments that precede and occur M&A,
confirming the hypothesis HG1.
Starting from the analysis of the variables that make up the economic characteris-
tics, the two significant variables, and according to the assumptions of the statistical
technique employed, were the Selic and Exchange rate. Both variables are consistent
with the hypotheses H5 and H7. The Selic rate showed an inverse relationship with the
M&A moments, and it is possible to affirm that increases in this rate reduce the proba-
bility of M&A occurrence.
This finding is supported by Oliveira (2014) and Silva (2014), who argue that the in -
crease in the Selic rate affects financial costs and increases market risk. In relation to
the Foreign Exchange, a direct relationship was observed, and it is possible to affirm
that increases in this variable positively influence the probability of occurrence of
M&A, being therefore consistent with the evidence presented by Ferreira & Callado
(2015).
In the dimension of market characteristics, it is observed that both variables in -
cluded in the model (Regulatory Framework and DPHH) were inconsistent with the hy-
potheses formulated. With respect to the market concentration (DPHH), it was ex-
pected that an increase in the variable would increase the rigor adopted by the compe-
tent entities in the judgment and approval of new M&A strategies, thus reducing the
probability of M&A occurrence. However, this expectation has not been confirmed
and, therefore, the statistics presented contradict the H1 hypothesis. Contrary to the
hypothesis formulated (H3), the regulatory variable was inversely related to the proba-
bility of occurrence of M&A, and is therefore not consistent with Bittencourt et al.
(2015).

3.2.3. Fitted Neural Network

With respect to ANNs, there is a greater flexibility with respect to the previously
presented assumptions. Table 7 presents the importance of the independent variables
used in the development of the adjusted neural network. It can be seen that the most
important variable for the study was C3, the index responsible for measuring the
growth rate of Adjusted Net Equity. The variables M4, M6, E4 and E7 that measure, re-
spectively, the expansion of credit operations, the evolution of operating expenses, the
net application rate at which financial intermediation income assets were invested and
the quality of operating income in the production of operating results.
The least important variables for ANNs were G1, EEIF, Regulatory Framework and
E10 that measure, respectively, the size of the institution, the specific effects of finan -
cial institutions that may not be included in the independent variables, SFN reformula-
tions and capacity of the bank in generating revenues in relation to income from finan -
cial intermediation.

Table 7: Importance of independent variables in the adjusted neural network.

Standardized Standardized
Order Variables Importance Order Variables Importance
Importance Importance

1 C3 0,039 100,00% 24 M5 0,021 53,80%

2 M4 0,037 96,60% 25 E2 0,021 53,40%

3 M6 0,037 95,70% 26 L2 0,02 52,10%

4 E4 0,035 90,70% 27 HH 0,02 51,00%

5 E7 0,034 88,50% 28 E5 0,019 50,20%

6 A2 0,029 74,90% 29 L5 0,019 50,00%

7 C2 0,029 74,80% 30 M&A in sec- 0,018 46,90%

tor
 19

8 Selic 0,029 74,80% 31 A1 0,017 43,40%

9 A4 0,028 73,30% 32 M2 0,016 42,40%

10 E12 0,028 73,30% 33 EET 0,016 42,30%

11 Inflation 0,027 71,10% 34 E1 0,016 41,90%

12 E8 0,027 69,60% 35 L1 0,015 40,10%

13 Exchange 0,027 69,60% 36 C5 0,015 38,70%

14 C4 0,026 66,90% 37 A5 0,015 37,80%

15 M1 0,025 64,90% 38 E3 0,013 33,90%

16 E6 0,024 63,20% 39 C1 0,012 31,70%

17 L3 0,023 59,40% 40 M7 0,012 31,30%

18 E11 0,023 58,90% 41 CR 0,012 31,30%

19 L4 0,022 57,90% 42 G2 0,012 31,10%

20 A3 0,022 57,60% 43 G1 0,011 28,80%

21 M3 0,022 56,90% 44 EEIF 0,01 26,10%

22 Return 0,022 56,40% 45 Regulation 0,009 22,40%

volatility mark

23 PIB 0,022 56,10% 46 E10 0,007 19,30%

3.2.4. Hybrid Model

In this phase of the work we chose to use the statistically significant variables used
in the explanation of the factors determining the moment when M&A strategies occur
in the companies acquired by the methods of logistic regression and discriminant anal-
ysis as inputs for the adjustment of a new neural network .
Given that ANNs models are inherently constructed and known as non-linear black
boxes, this work step is justified by the a priori knowledge of the behavior and relation-
ship of the independent variables demonstrated by the previous methods (DA and LR)
and, consequently, the potential increase of control over ANNs modeling process.
Thus, the variables selected to enter this new model were C1, C3, A1, M3, E1, E2,
E4, E6, E10, L2, L3, L4, G1, Selic, Exchange, MR and DPHH. Table 8 shows the impor -
tance of the independent variables used in the development of the adjusted neural
network. It can be noticed that the most important variable for the study was E2, index
responsible for measuring the profitability of the assets. Also important for the model
are the variables E1, Selic, A1 and Exchange.
The least important variables for ANN were G1, EEIF, Regulatory Framework and
TSE, which measure, respectively, the size of the institution, the specific effects of fi-
nancial institutions that may not be included in the independent variables, SFN refor-
mulations and specific effects of time.

Table 8: Importance of independent variables in the adjusted Hybrid Model.

 Variables Importance Standardized Importance

C1 ,038 34,6%

C3 ,054 49,3%

A1 ,070 63,1%

M3 ,043 39,2%

E1 ,080 73,0%

E2 ,110 100,0%

E4 ,047 43,1%

E6 ,056 50,5%

E10 ,042 38,5%

L2 ,047 42,3%

L3 ,051 46,2%

L4 ,046 41,9%

G1 ,035 31,3%

Selic ,079 72,0%

Exchange ,060 54,1%

Regulation mark ,031 27,9%

HH ,039 35,2%

EEIF ,036 32,3%

EET ,037 33,5%

3.3. Predictive Comparison between Adjusted Models

Table 9 shows the comparison between the significant variables, according to the
DA and LR methodologies. Note that logistic regression used a greater number of vari-
ables to determine the dependent variable. It is also verified that the influence of vari -
ables M3 and E1 was consensual in both models.

Moreover, it is possible to observe that, in the discriminant analysis, no market or

economic variable was used, and therefore, the moment of M&A is defined according
to the characteristics of the firm. The DA results were sufficient to confirm four hy -
potheses originally formulated.

Regarding the LR methodology, it can be inferred that many characteristics of the

firm influence the moment of adoption of M&A strategies by the acquiring institution,
since 10 variables are part of the model. Besides, they help to explain the dependent
 21

variable, 2 variables referring to economic characteristics (Selic and Exchange) and 2

variables referring to market characteristics (regulatory system and market concentra-
tion measured by the Herfindahl-Hirschman index on total deposits). In total, there
were 14 significant variables and, consequently, the same number of hypotheses in-
volved. Thus, from the verification of the signs presented by the coefficients of the
variables, it was possible to accept 9 hypotheses originally formulated.
Table 9: Comparison between variables that make up the models.
Methodology Significant variables Hypothesis involved Acceptance or rejection

DA A1 HA1 Acceptance

L2 HL2 Acceptance

M3* HM3 Acceptance

E1* HE1 Acceptance

E10 HE10 Rejection

LR C2 HC2 Rejection

C3 HC3 Acceptance

M3* HM3 Acceptance

E1* HE1 Acceptance

E2 HE2 Rejection

E4 HE4 Acceptance

E6 HE6 Acceptance

L3 HL3 Acceptance

L4 HL4 Rejection

G1 HG1 Acceptance

H5 Acceptance

H7 Acceptance

H3 Rejection

DPHH H1 Rejection

To verify which of the techniques used is more efficient for the modeling of M&A
operations, techniques were applied for the comparison of the results. Initially the sen-
sitivity and specificity of the models were calculated. For the calculation of the sensitiv -
ity, the correct predictions for the dependent variable are considered when it assumes
value 1 (M&A = 1). The calculation procedure is presented in equation (12). The results
are shown in Table 10.

(10)

ˆ
where Y is the number of correctly predicted cases for M&A = 1 and the Y is the
number of observed cases where M&A = 1. For the calculation of the specificity, the
correct predictions are considered for the dependent variable when it assumes value 0
(M&A = 1). The calculation procedure is presented in equation
(13).

(11)

ˆ
where Y represents the number of correctly predicted cases for M&A = 0 and
the Y represents the number of observed cases where M&A = 0.
According to Maroco (2007), the predictive capacity of a model can be evaluated by
the optics of the sensitivity and specificity as shown in Table 6. For the calculations of
both techniques, the total sample (classification and test) was considered.
Table 10: Sensitivity and specificity analysis.
Sensitivity and specificity Predictive power

Below de 50% Insignificant prediction

From 50% to 80% Reasonable prediction

Above 80% Good Prediction

Besides, Table 10 shows the false 0 and false 1 rates found by the models. Such sta-
tistics refer to the percentages of cases classified erroneously.

Table 11: Comparison of the predictive efficiency of the models.

Methodology Sensitivity Specificity False 0 rates False 1 rates

DA 96,48% 53,18% 46,82% 3,520%

LR 68,00% 78,83% 21,17% 32,00%

ANN 98,7% 100,0% 00,00% 1,300%

Hybrid 100,0% 99,3% 00,06% 00,00%

 23

From the results presented in Table 10 it can be seen that all statistics for sensitivity
and specificity are greater than 50%, showing that all predictions are reasonable or
good. The regularity and expressive values ??found for the ANN methodology and for
the adjusted hybrid model are highlighted, denoting its robustness for treatment and
prediction of the dependent variable. The technique presented high efficacy in the
forecast and reached the totally correct prediction for the periods in which M&A
strategies are not observed. Besides, it is noticed that the selection of the variables by
LR and DA, a priori, did not significantly impair the accuracy of the model.
Regarding sensitivity, the methodology that presented the lowest performance was
LR, 68.00%. Concerning specificity, the worst performance was observed in the applica-
tion of the DA methodology (53.18 %). False 0 and 1 rates confirm previous statistics,
demonstrating that the least effective methodologies were DA (from the false 0 rate)
and LR (from the false 1 rate).
Table 11 shows the overall predictive capacity of the fitted models. In absolute
terms, ANN and the hybrid model show a clear superiority in relation to the other
methodologies, since they presented a percentage of expressive accuracy.

Table 12: Comparison of global predictive capacity.

Methodologies %

DA 67,16%

LR 72,04%

ANN 99,70%

Hybrid 99,60%

To test the significance of the performance difference between the adjusted mod-
els, the Kappa statistic was applied. Such statistics are commonly used to compare per-
formances of methods used with the same goal in the same study.
Thus, the contingency tables obtained through the classification of each method are
used as a database for the calculations (Muller 1999).
With the due support of asymptotic theory (Wooldridge 2011) and knowing that
the difference between two Kappa statistics, when the N (number of observations) is
sufficiently large, has a distribution approximately normal, the test of significance be-
tween the coefficients k the procedure presented in equation (14).

(12)
where ki = Kappa coefficient for method i; ki = Kappa coefficient for method j; δki2 =
Kappa coefficient sample variance for method i and δkj2 =Kappa coefficient sample vari-
ance for method j. Therefore, the hypothesis of the test is: H0 = there is no difference
between the performances of the two methods and H1 = there is difference between
the performances of the two methods.
Thus, the statistic found was confronted with the standardized Z-value at 5% signifi-
cance and the results are presented in Table 12. It can be seen that Kappa statistic
showed within the acceptance region (-1.96 a + 1.96) for the comparisons between DA
and LR and, therefore, it is not possible to affirm that there is a difference of perfor-
mance among the methodologies, despite the slight superiority of overall prediction of
LR in relation to DA.

Table 13: Comparison between models: Kappa index in pairs.

DA LR ANN

DA -

LR -0,305 -

ANN -2,57* -3,07* -

Hybrid -2,37* -2,86* 0,012

However, when comparing the performance of the techniques with ANN (pure and
hybrid), we can see that the Kappa statistics are outside the acceptance area of the hy-
pothesis H0, and it is possible to affirm that there are differences between the method-
ologies employed, denoting a superiority of ANN (pure and hybrid) when compared to
the other methodologies used. When comparing ANN and the hybrid model, it is not
possible to state, by Kappa statistic, that there is a difference between the perfor-
mances of the two models.

4. Final Remarks
Given the lake of empirical studies on mergers and acquisitions in financial institu-
tions and the absence of statistical models to forecast the occurrence of mergers and
acquisitions, the objective of this study was to compare four forecast models to iden-
tify patterns of occurrence in M&A strategies. The hypotheses of the work were devel-
oped to test the degree of determination of market, economic, and firm-specific vari -
ables at the time M&A occur.
The results showed that the independent variables used are directly related to the
moment of occurrence. However, the high predictive power demonstrated by the ad-
justed ANN (pure and hybrid) is emphasized. The network architecture used could cor-
rectly predict about 99.7% and 99.6% of the periods in which M&A occur and do not
occur. The worst level of accuracy was observed in the application of DA methodology
(67.16%).
The selection of the independent variables through DA and LR a priori did not sig -
nificantly alter the forecasting power of the traditional network. It can be observed
 25

that the other variables not included in the hybrid models did not present great contri-
butions to the predictive power, since the hybrid network presented similar predictive
capacity when compared to the traditional one.
The comparison of the predictive power by the Kappa statistic denoted the superi-
ority of the neural networks, whether in their traditional or hybrid form, in the predic-
tion or in the recognition of the patterns of occurrence of M&A. However, due to the
inherent characteristics of the method, it is not possible to study the relationship be -
tween variables, which is one of the main limitations of the models.
Finally, the importance of the development of works like this for emerging markets
is emphasized, since forecasting models can bring more security and soften the risk as-
sumed by the investors. Besides, they can provide useful information for business deci -
sion-making, since it covers important variables for M&A’s target and non-target rat-
ing. It is hoped, with this work, to contribute to the discussions about the importance
of M&A forecast models in the banking sector and in emerging markets.
For future research, because it is a study for a specific sector of the economy (bank-
ing sector), it is suggested, as an objective of new studies, the investigation of other
sectors of economic activity. It is believed that, in this way, it will be possible to reach a
broader understanding of the determinants of M&A strategies, whether related to the
firm’s specific market dynamics, economic dynamics and/or dynamics.
It is believed that the application of these suggestions can further increase the ro-
bustness and the classification power of institutions that have or have not been
merged and acquired.

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 Annex
The annex contains three tables:

• Frame 1: Description of the variables (firm characteristics) used in the analyzes.

• Frame 2: Synthesis of the variables of market and economic characteristics used in the research.
• Frame 3: M&A strategies studied in the first stage of the work.

Re
vi
s-
ta-
Co
lo
m-
bi
an
ad
eE
st
ad
sti
ca,
Ed
i-
tio
n-
fo
ra
ut
ho
rs
 29

Frame 1: Description of the variables (firm characteristics) used

in the analyzes.
Dimension Var Description and calculation methodology Interpretation Formulated Hy

Capital Ad- C1 Calculated by the ratio of total assets to adjusted sharehold- In the solvency perspective, the smaller the better. The Cen- HC1: The C1 var
equacy In- ers’ equity. It measures the use of own funds in the financ- tral Bank considers values between 6 and 12 as normal, and inversely relate
dicators ing of assets held by the entity. extreme values deserve more attention. profile and the M

C2 Calculated by means of the ratio between the adjusted fixed The smaller the better. Ideally, in financial terms, the com- HC2: The variab
assets and the adjusted reference equity. It shows the per- pany has sufficient Stockholders’ Equity to cover Fixed As- versely related t
centage of impairment of the reference equity in relation to sets and still have a sufficient portion to finance Current As- file and the mom
asset immobilization. sets.

C3 The result of the subtraction between adjusted sharehold- The bigger the better. Ideally, the wealth of the financial in - HC3: The variab
ers’ equity and adjusted shareholders’ equity of the last bal- stitution should grow as much as possible from one period directly related
ance sheet is divided by the adjusted shareholders’ equity to another. file and the M&A
of the last balance sheet. Measures the growth rate of Ad-
justed Equity.

C4 The result of the subtraction between strict PLA and the The bigger, the better, because one of the objectives of the HC4: The variab
strict PLA of the last balance sheet is divided by the strict banks is that their own resources increase with each pe- and is directly r
PLA of the last balance sheet. It shows the evolution of the riod. ing profile and th
Re equity that represents the own resources that will face the
vi risks assumed in the applications of the resources.
s-
ta-
C5 Calculated by means of the quotient between social capital The bigger the better. Less dependence on thirdparty re- HC5: The variab
Co and total assets. It measures the percentage of total assets sources can reduce risk. However, very high values are not directly related
lo financed by shareholders’ funds. recommended. file and the M&A
m-
bi Indicators of A1 Calculated by means of the quotient between financial in- The higher, the better, because the financial intermediation HA1: The A1 va
Assets Qual- termediation income assets and total assets. It measures income assets are responsible for boosting the financial in- is directly relat
an ity the proportion of assets that generate income from finan- termediation revenues of the banks. profile and the M
ad cial intermediation in relation to Total Assets.
eE
st A2 The relation between the portfolio classified from D to H The smaller the better. Ideally, credit operations that HA2: The A2 var
and the total classified portfolio. Demonstrates portions of present a higher risk of default represent the smallest por- inversely relate
ad
the loan portfolio classified at levels considered to be tion of the total credit portfolio. profile and the M
sti higher risk.
ca,
A3 Relationship between the portfolio classified from D to H - The lower, the better, since the portion not computed as HA3: The variab
Ed Provision estimated from D to H and adjusted shareholders’ loss of the higher risk credit operations should be the small- inversely relate
i- equity. Demonstrates unprovisioned portion of higher risk est possible in relation to the financial institutions’ own re- profile and the M
assets in relation to Adjusted Shareholders’ Equity. sources
tio
n-
fo A4 The difference between the total assets and the total assets The larger, the better, that is, the greater the assets of finan- HA4: The variab
ra of the last balance sheet is divided by the total assets of the cial institutions, the greater the possibility of leverage in inversely relate
last balance sheet. It measures the growth rate of Total As- their results and market share. profile and the m
ut sets of banks.
ho
A5 Relationship between total deposits and total assets. It mea- The bigger the better. Because as a financial intermediary, HA5: The variab
rs sures the percentage of total assets financed by deposits. banks need a larger volume of deposits, thus increasing the is directly relat
resources available to them that will be passed on to bor- profile and the m
rowers.

Indicadores M1 The absolute value of administrative expenses is divided by The smaller, the better, because expenses decrease the re- HM1: The variab
de Man- the sum of the financial intermediation result, service rev- sult. In this sense, the ideal is that the administrative ex- inversely relate
agement enue, TDVS adjustment and cash flow hedge. It measures penses represent, in proportional terms, the smallest possi- profile and the m
(Eficincia) the proportion of administrative expenses in relation to the ble share of the banks’ results.
result of financial intermediation and service revenue.
 M2 The difference between the absolute value of administrative The lower, the better, because lower amounts of adminis- HM2: The variabl
expenses and service revenues is divided by the sum of cur- trative expenses demonstrate greater efficiency in the man- inversely related
rent financial intermediation income assets and the last bal- agement of financial intermediation assets of higher values. profile and with th
ance sheet and, subsequently, divided by two. Measures the
profitability of financial intermediation income assets to
cover administrative expenses. Positive figures show that
service revenues were not sufficient to cover administrative
expenses.

M3 Expressed by the quotient between the service revenue and The bigger the better. Ideally, the Service Revenue should HM3: The variable
the absolute value of administrative expenses. It presents be able to cover the total Administrative Expenses of the fi- and is directly rel
the proportion of coverage of administrative expenses by nancial institution. ing profile and the
service revenues.

M4 Expressed by the quotient of the current and previous The bigger the better. Credit operations represent one of HM4: The variable
year’s credit operations, and the result is subtracted by 1. the main assets responsible for obtaining profits from and is directly rel
Measures the expansion of credit operations. banks. In this sense, the increase in credit operations means ing profile and the
greater possibility of positive results.

M5 Expressed by the quotient between current and previous The bigger the better, since one of the goals of the banks is HM5: The variable
year’s operating revenues and the result is subtracted from to increase their operating revenues more and more. directly related to
1. Measures the evolution of operating revenues. file and the mome

Re M6 Expressed by the quotient between the operating expenses of The smaller the better. In contrast to the previous indicator HM6: The variable
vi the current year and the previous year, and the result is sub- (M5), the ideal is for banks to demonstrate efficiency by re- inversely related
tracted by 1. Measures the evolution of operating expenses. ducing operating expenses each period in order to maxi- profile and the mo
s-
mize their results.
ta-
Co M7 Expressed by the quotient between the operating expenses The lower this proportion, indicates that the financial insti- HM7: The variabl
lo and the total assets. Measures the cost associated with man- tution is being efficient in reducing expenses in relation to inversely related
m- aging all assets. The smaller the better. total assets. profile and the mo

bi
Indicadores E1 Net income is divided by the average adjusted shareholders’ The larger, the better, because shareholders want the return HE1: The variable
an de Earn- equity for the current year and the previous year. It mea- on capital invested in the organization to be as large as pos- and is directly rel
ad ings sures the remuneration of the banks’ own capital. sible, including greater than other investment alternatives. ing profile and the
(Rentabili-
eE dade)
st
ad
sti E2 Net income is divided by the average total assets of the cur- The bigger the better. Similar to the interpretation of the HE2: The variable
rent year and the previous year. It measures the adequacy previous indicator (E1), the ideal is that the bank maximizes rectly related to th
ca, of earnings and also the capacity to build equity. Indicates its results in relation to the total resources available to the and the M&A mom
Ed the profitability of the asset. company.
i-
tio E3 Income from credit operations is divided by the average of The higher, the better, because a higher rate obtained by HE3: The variable
current and prior year credit operations. Reveals the appli- credit operations indicates greater possibilities of profit. directly related to
n- cation rate in credit operations in the analyzed period. file and the M&A m
fo
ra E4 Income from financial intermediation is divided by the aver- The bigger the better. Ideally, financial intermediation in- HE4: The variable
ut age of financial intermediation income assets of the current come assets should have the highest rate possible so that directly related to
year and the previous year. It measures the net investment the bank’s financial intermediation revenues are maxi- file and the M&A m
ho rate at which financial intermediation income assets were mized.
rs invested.

E5 The result of financial intermediation is divided by the aver- The higher, the better, because the return on funds invested HE5: The variable
age of financial intermediation income assets of the current in financial intermediation income assets should be as large directly related to
year and the previous year. It shows the profitability of the as possible, as a way to maximize profit. file and the M&A m
financial intermediation income assets of the institution.

E6 Expressed by the quotient between the result of financial in- The higher, the better, since the main activity of financial in- HE6: The variable
termediation and operating income. It shows the result of termediaries should represent significant amounts in rela- directly related to
the main activity in relation to the amount of the operating tion to total operating revenues. file and the M&A m
revenues.
 31

E7 Expressed by the quotient between operating income and The higher, the better, because the ideal is that operating ex- HE7: The variable
operating income. Demonstrates how much of operating in- penses are minimal, maximizing the result of the bank’s op- and is directly rel
come was generated in relation to operating revenues. eration. ing profile and the

E8 Expressed by the quotient between net income and operat- The bigger the better, because the ideal is for the financial HE8: The variable
ing income. Demonstrates how much net profit was gener- institution to maximize its economic result. Higher values directly related to
ated in relation to operating revenues. for this index mean that the institution is able to obtain file and the M&A m
lower values for expenses.

E9 Expressed by the quotient between the operating revenue The bigger the better, because the ideal is for the bank to ob- HE9: The variable
and the average between the total assets of the current year tain the highest operating revenue possible with the mini- and is directly rel
and the previous year. It shows how much the bank is able mum of invested resources. ing profile and the
to generate revenues in relation to total assets.

E10 Expressed by the quotient between the operating income
and the average between the financial intermediation in-
come assets of the current year and the previous year. It
shows how much the bank is able to generate revenues in
relation to financial intermediation income assets.
The higher, the better, because it is fundamental that the fi - HE10: The variabl
nancial institution obtains good revenues based on re- is directly related
sources invested in intermediation income assets. profile and the M&

E11 The difference between operating income and operating ex- The bigger the better, because shareholders are interested HE11: The variabl
penses is divided by adjusted shareholders’ equity. Mea- in the operational return of their capital that was invested in is directly related
sures operating profitability over Shareholders’ Equity. the financial institution. file and the M&A m
Re
vi E12 The difference between operating revenues and operating The bigger the better, because it is fundamental that the HE12: The variabl
expenses is divided by total assets. Measures operating prof- bank achieves good results in its operation with the mini- is directly related
s- itability over Total Asset. mum resources used to obtain it. profile and the M&
ta-
Co Liquidity L1 Measured by the ratio between cash and total assets. It The bigger the better. From the liquidity perspective of the HL1: The variable
lo Indicators shows the participation of the most liquid in the institution financial institution, it is important to keep part of its total directly related to
in relation to the total of its assets. resources in the form of available. file and the M&A m
m-
bi
L2 Measured by the ratio of short-term assets to total assets. The bigger the better. Similar to the interpretation of the in - HL2: The variable
an Demonstrates the ratio of short-term assets to total assets. dicator (L1), it is important that the bank maintains a con - directly related to
ad siderable portion of its total assets in its short-term assets. file and the M&A m
eE
st L3 Measured by the quotient between short-term assets and The higher, the better, because the financial institution must HL3: The variable
immediate liabilities. It reveals the ability to pay immediate keep resources available in the short term to pay off its im- and is directly rel
ad
liabilities with short-term assets. mediate debts. ing profile and the
sti
ca, L4 Measured by the quotient of cash and demand deposits. It The bigger the better. Ideal that is equal to or greater than 1, HL4: The variable
Ed shows the bank’s ability to honor its immediate commit- as the financial institution must maintain cash and cash and is directly rel
i- ments. equivalents to cover withdrawals made as a result of de- ing profile and the
mand deposits, promoting financial security.
tio
n-
fo L5 Measured by the ratio of short-term assets to total deposits. The bigger the better. When the financial institution has val- HL5: The variable
ra It is an indicator that reflects the bank’s current liquidity. ues greater than 1, the financial institution has short-term directly related to
realization assets that exceed the funding in the form of de- file and the M&A m
ut posits, implying a financial slack.
ho
rs Indicators G1 Size: measured by the logarithm of total assets. It is believed that there is a greater ease of occurrence of HG1: The variable
General mergers and acquisitions processes in larger organizations. and is directly rel
characteris- ing profile and the
tics

G2 Experience in the market, measured by the logarithm of the or- It is believed that the market experience favors the occurrence HG2: The variable
ganization’s time horizon. of M&A. and is directly rel
ing profile and the
 Frame 2: Synthesis of the variables of market and economic characteris-
tics used in the research.
Market Characteristics Index Description Hypotheses formulated

- Concentration ratio for total de- DPCR5

posits; OCCR5
- Concentration ratio for credit op- ATCR5
erations; PLCR5
- Concentration ratio for Total As- DPHH
sets; OCHH
- Concentration ratio to sharehold- ATHH
ers’ equity; PLHH
-HH index for total deposits;
- HH Index for Credit Operations;
- HH Index for Total Assets; Metrics used to concentrate the Brazilian market.
- HH Index for Shareholders’ Eq-
uity;

H1: The market concentration

tion and inversely related to
mergers and acquisitions.

Re Stability of the stock market Logarithmic difference in share price at time t and time t-1 H2: The stock market stabilit
directly related to the momen
vi acquisitions.
s-
Regulatory System Dummy variable representing the SFN changes and restructurings H3: The dummy variable, Reg
ta- shown in Table 1. tionship and is directly relate
Co of mergers and acquisitions.
lo Number of M&A in the sector Absolute number of merger and acquisition strategies of the Brazilian H4: The variable number of M
m- financial sector. a negative relation and inver
bi occurrence of mergers and acq

an Interest rate (SELIC) Real interest rate of the economy, represented by the referential H5: The variable SELIC rate
ad rate of the Special Settlement and Custody System (SELIC). versely related to the momen
acquisitions.
eE
st Gross Domestic Product (GDP) National production growth, calculated by deflated and seasonally ad- H6: The variable GDP shows
justed GDP. and directly / inversely relate
ad of mergers and acquisitions.
sti
Exchange rate Change in the real exchange rate (R$/ US$) H7: The exchange rate variab
ca,
is directly related to the mom
Ed and acquisitions.
i-
Inflation Variation in the inflation rate as measured by the IPCA. H8: The inflation variable pres
tio ship and directly / inversely r
n- rence of mergers and acquisiti

fo
ra Frame 3: M&A strategies studied in the first stage of the
ut work.
ho Purchasing Institu- Institution ac- Date of opera- Purchasing Institu- Institution ac- Date of opera-
rs tion quired tion tion quired tion

Bradesco BCN November/1997 Itau Banerj December/1996

Credireal November/1997 Bemge December/1998

Baneb December/2000 Banestado December/2000

Boavista September/ BEG March/2002

2000

Mercantil January/2002 BBA Credi- September/

de SP tanstalt 2002

BEA January/2002 Banco Fiat November/2002

 33

Cidade February/2002 Banco AGF November/2003

BBV June/2003 Banco Intercap December/2004

Zogbi November/2003 BankBoston September/

2006

BEM February/2004 Unibanco December/2008

Morada April/2005 Credicard May/2013

BEC December/2005 CorpBanca January/2014

(Chile)

AMEX March/2006 Dibens June/2005

BMC January/2007 Noroeste December/1997

Agora March/2008 Bozano, Simon- June/1998

sen

Banco IBI June/2009 Meridional September/

2000

BERJ May/2011 Banespa March/2001

HSBC August/2015 ABN Amro August/2008

(Banco
Real)

Banco do Brasil Nossa Caixa December/2009 Banco Real April/2009

Banco Vo- February/2009 Sudameris December/2003

torantim

Banco Patagnia( April/2010 Lloyds Bank March/2004

gentina) A
r-

Banco May/2011
Postal

Eurobank October/2012
(Flrida EUA)

Banco das Naes October/2000

Total 45