Effects of mergers and acquisitions in the banking sector of the United States

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Abstract

The increase in merger and acquisition activities may be understood as a consequence of the destabilization of the competitive environment for banking services over the past years. This study was carried out to determine the effect of mergers and acquisitions in the banking sector of the United States. Study participants were recruited from three banks that have undergone mergers and acquisitions in the last six years.  The mergers and acquisitions took place between years 2011-2014. A quantitative research approach was adopted for the purpose of this study. A multiple regression model was used to determine the effect of independent variables on the dependent variable. Study findings show that mergers and acquisitions have a significant effect on Return on equity and profitability, Shareholders value, Synergy and Operational efficiency.

Introduction

The world of finance is characterized by numerous expansions and consolidations.  In the recent past, various banks have sought expansion through waves of mergers and acquisitions over the years. The United States, in particular, has seen many of such reconstructions in the past decade.  Starting with the Europe and the United States, the wave has spread to other nations around the world. These have exponentially increased the speed of expansions of trade agreements and international trade volumes and transactions. The result of these integrations is a question that requires detailed research to determine. It has also given rise to a range of financial activities to offer as well as an array of investment.  From 1980, the structure of the U.S. banking industry has significantly changed. In the 1990s, globalization and deregulation have led another wave that led to mergers and acquisitions in the banking and telecommunications sectors. The year 2015 was marked by many mega deals compared to the previous year. Some researchers have pointed to the incredible amount of confidence in the banking sector or signs of recovery from the banking crisis. Firms undertake these types of reconstructions to become more competitive. The justification for mergers and acquisitions is to increase revenue resulting from a larger market share and to reduce the cost of doing business. The relative robustness of corporate reserves has also been cited as a factor that enabled banking firms to engage in merger and acquisition deals. Given that interest rates are at historic low in the United States, banks have the readily available capital to engage in mergers and acquisitions.  Evidently, bank acquisition activities have involved well-performing large banks acquiring smaller financially sound banks to improve efficiency and allow for growth through scale.  Mergers and Acquisitions slowed down during the past financial crisis. With the increase in Mergers and Acquisitions, the number of banks in the United States continues has declined decline as troubled banks have either been acquired by well-performing banks or failed. Even so, as the banking industry recovered from the crisis, mergers and acquisition activities have increased.

Statement of the problem

Mergers and acquisitions are a significant part of the United State’s banking sector landscape, and may continue to be so for the anticipated future. These forms of reconstructions are indicative of a re-scaling of banking activities within the United States as firms attempt to grow and diversify their operations across regions, financial services markets and nations.  Managers and Shareholders of financial institutions turn to mergers and acquisitions in the hope of improving the financial performance of their firms. The research subject has produced mixed results. Some researchers have established no meaningful improvement in financial performance arising from mergers and acquisitions.  Others have indicated that such restructuring has improved the financial performance of a significant number of firms as indicated by Earnings and profitability ratios. Stakeholders contemplating mergers or acquisitions are at a loss due to the inconsistency of study findings. The conflicting results have made it challenging for stakeholders in the banking sector to determine whether merging or acquiring other firms is a worthwhile undertaking.   Some researchers have argued that mergers and acquisitions in the United State’s banking sector are better seen as an outcome of, rather than a direct cause of, competitive change within the United States banking sector. Thus, the increase in merger and acquisition activities may be understood as a consequence of the destabilization of the competitive environment for banking services over the past years. While the industry has seen such significant changes, only a few studies have been conducted to determine the effects of mergers and acquisitions in the banking sector of the United States. Many researchers have focused on the factors that have led to mergers and acquisition activities. It would be of value to determine the effects of such activities so as to determine whether banks have achieved their initial objectives.

Purpose of the study

Trends indicate that the transformation of the banking sector is ongoing, and the number of banks continues to decrease. There have also been signs that banks have begun to stabilize.  Many researchers and academicians have focused on the causes of mergers and acquisitions in the banking sector. Only a few studies have been conducted to determine the impact of mergers and acquisitions in the banking sector of the United States. Literature do not provide clear evidence on whether banks involved in these reconstructions any yield profits. Previous studies are unclear if mergers and acquisitions result in the efficiency of the firm or positive impact on the shareholders’ wealth.  Other studies indicate that financial institutions involved in mergers or acquisition increase efficiency, but they do not indicate any impact on shareholders’ wealth. On the other hand, other studies have found that mergers and acquisitions have resulted in enhanced shareholders’ value and increased efficiency. This study will contribute to the body of knowledge on mergers and acquisitions in the United State’s banking sector. The findings of this study will provide key stakeholders insights upon which they can base their decisions. The study sought to determine the effects of mergers and acquisitions in the banking sector of the United States.

Hypothesis

 

Shareholders do not have necessary skills and expertise required in the effective management of a firm. The solution adopted by shareholders is to appoint other parties to manage their investment on their behalf. Through the appointment of managers, shareholders appoint agents to carry out essential roles on their behalf. Shareholders expect managers to increase the value o investment over time. Managers may decide to undertake mergers and acquisitions when necessary to increase shareholders value (Hawawini & Swary, 1990).

Cost of capital theory

An economy revolves around the use of capital by individuals and firms.  The competence with which entities use capital entrusted to them determines their success and profitability.  Firms consistently invest in projects that have higher returns. This is the practical application of cost of capital theory.  Firms are strongly encouraged to expand their use of scarce resources including the capital. Firms less able to cover the costs of capital are often encouraged to waste less or yield limited resources to other firms that can put them to better use. Investors must determine the best measure to improve their returns.  This may include undertaking mergers and acquisitions that have potential returns to them. To do so, they must determine the worth of the firm being acquired. Often, acquiring firms pay a considerable premium on the stock market value of the target firm. The justification is to achieve synergy.  A merger or acquisition benefits shareholders when a firm’s post-acquisition or post-merger share price increases due to potential synergy.

Mergers and acquisitions

Although the mergers and acquisitions are often used interchangeably, they represent diverse methods of firms’ consolidation processes. While a merger is a combination of two firms to form a new entity, an acquisition is the purchase of a firm by another where no new entity is formed. For any merger and acquisition, there are two parts: the bidder and the target firm. The bidder firm attempts to merge with or acquire another firm.  The target firm is acquired or bought by the bidder firm. The combination of assets may be in the form of asset acquisition of stock acquisition (Gaughan, 2010).

Asset acquisition

In an asset acquisition, the acquirer firm acquires all or a part of the target’s firm’s assets and liabilities. When all assets are acquired, the target is liquidated. Therefore, separately identified assets and liabilities of the target firm are obtained by the acquiring firm. The acquiring firm can select which assets and liabilities to purchase, hence avoiding certain assets and liabilities for which it does not want to assume liability. An asset purchase agreement between the two firms describes and reflects values of each asset and liability acquired. Often, assets purchased in an asset sale are not held in a separate legal entity.  Such assets can only be organized in a stock sale when a separate legal entity exists prior to sale. Operating divisions are usually not organized into separate legal entities while subsidiaries of consolidated companies are regularly organized as separate legal entities.

The acquirer may obtain a major tax advantage. The acquirer receives stepped-up tax basis when acquired net assets are written up from their carrying values on the target’s tax balance sheet to fair value on the acquirer’s tax balance sheet. The higher tax resulting from the activity minimizes taxes on any gain on sale of those assets in future. Under United States tax law intangibles such as goodwill acquired in a taxable asset purchase should be amortized over 15 years period. The amortization is tax-deductible(Gaughan, 2010)..

Stock acquisition

In a stock acquisition, all assets and liabilities of the target firm are obtained upon transfer of stock to the acquirer firm. As a result, the transaction does not have any tedious valuations of the target’s individual assets and liabilities. No stepped-up tax basis is received by the acquirer, rather a carryover basis. The goodwill that may result from the process of stock acquisition is not tax-deductible. The stock sale may be treated as an asset sale for tax purposes when an Internal Revenue Code is made jointly by the acquirer and target firm or solely by the acquirer. Although a stock purchase is characterized by the acquisition of all assets and liabilities by the acquirer, the target firm may be contractually allocated some unwanted liabilities if the acquirer sells them back(Gaughan, 2010).

Mergers

In a merger, the targets firm’s assets and obligations are absorbed by the acquiring firm. After the completion of the deal, the target company legally ceases to exist, and the merged firms exist as a separate entity. Sometimes, a reverse merger may occur where the target firm absorbs the target firm. There are different forms of mergers discussed in the literature. The most commonly referred to types of mergers include a horizontal merger, conglomerate merger, market extension merger, product extension merger and vertical merger. The five types of mergers are grouped according to the purpose of the business transaction, economic function and relationship between the merging firms (Rhoades, 2010).

Conglomerate

A conglomerate is the combination of businesses between firms involved in completely unrelated business activities. A conglomerate may be pure or mixed.  Firms in Pure conglomerate mergers have nothing in common while those involved in mixed conglomerate mergers are look for market extensions or product extensions.  An example of a conglomerate merger took place between the American Broadcasting Company and the Walt Disney Company (Rhoades, 2010).

Horizontal Merger

A horizontal merger occurs between firms in the same industry. Most banks are involved in this form of merger with smaller banks. Forms involved in horizontal mergers operate in the same sector, offering similar types of products and services. These firms are often competitors in the industry.  Industries with fewer firms are often characterized by horizontal mergers as competition increases with potential gains and synergies in the market. The goal of engaging in the horizontal merger is to build new larger organizations with more market share. The merging firms are very similar, and there may be opportunities to join certain operations or reduce costs (Rhoades, 2010).

Market Extension Mergers

Market extension mergers take place between two firms companies that deal in the similar products and services but operate in separate markets.  Market extension mergers are carried out to ensure that merging firms get access to a larger market and acquire a larger client base (Rhoades, 2010).

Product Extension Mergers

Product extension mergers happen between two firms that deal with related products and operate in the same market.  A product extension merger enables merging firms to group together their offerings and acquire a large consumer base. The objective of this type of merger is to earn higher profits (Rhoades, 2010).

Vertical Merger

A vertical merger involves two firms with similar intermediary products for a particular finished product. A vertical merger happens between different firms operating at different levels within an industry’s supply chain. The merging of operations increases synergies arising from efficient operations of merging firms (Berger et al., 2001).

Reasons for mergers and acquisitions

Based on the literature, Mergers and acquisitions are formed for various motives. The first is the belief that two firms together are more valuable compared to when they exist separately.  Every firm has a reason to proceed to mergers and acquisition in the banking industry. However, all firms have a common purpose to value maximization. Individual firms often consolidate in order to achieve a larger market share and greater efficiency through merger and acquisition deals. Many banks have undertaken mergers and acquisitions due to changes in regulation and technology. In some other cases, banks merge and acquire so as to create a more competitive entity, achieve greater efficiency or acquire a larger market share.   There are various drivers to mergers and acquisitions including increased economies of scale, geographical diversification, leveraged investment in technology, revenue and market share, improved skills and expertise as well as pressure for performance. Mergers and acquisitions accelerate a bank’s expansion and are often used as an alternative to setting up new branches (Gaughan, 2010).

As banks become larger, the pressure to achieve efficiency and economies of scale has increased. Mergers and acquisitions allow firms to compete with larger banks.  Mergers and acquisitions are attractive forms of improving efficiencies and economies of scale through the reduction of fixed unit costs.  Other factors such as advancement in technology have also contributed to mergers and acquisitions as forms of reconstructions. These advancements have allowed banks to expand areas of operations both within and outside borders. Innovations such as improvements in technology and communications have allowed firms to do business in previously underserved areas and facilitated cost reductions. Also, the innovations have pressured banks to reduce cost structures, which in turn might have motivated mergers and acquisitions (Rhoades, 2010).However, mergers and acquisitions do not always produce positive returns. Sometimes, they result in unfavorable outcomes, particularly when transactions are not strategically executed or planned.  The acquiring firm needs to identify various risks and business considerations. Projected cost savings may not materialize for various reason including unforeseen credit issues at the target, management incompatibility between the involved firms, poor employee morale, and other unanticipated adjustments. Additionally, the acquirer and the target firm may face challenges in integrating different operating systems resulting in elevated operational risks. Such risks can be minimized by performing forming merger, integrating the best practices and infrastructure from both firms, comprehensive due diligence and establishing and retaining strong management information systems (Berger et al., 2001).

Economies of scale and scope

Mergers and acquisitions have become a critical part of the corporate finance world. Due to dynamic market changes, only the most innovative businesses survive. Firms use different forms of corporate restructuring such as acquisition, merger, bankruptcy and many others to survive the competition. The speed that firms cease to exist is dependent mainly on their size, national security and the influence that firms have on the economy. The banking industry is one of the most dynamic markets where banks decide to merge due to diseconomies of scale.  Mergers and acquisitions result in a cost reduction that arises from an increase in output of products and services. Also, the economies of scale may arise due to an inversion of the relationship between per unit fixed costs and the quantity produced. Economies of scale also reduce the average variable cost due to the effect of operational synergies. Thus, in the mergers and acquisition framework, the consolidation of two banking firms potentially reduces fixed and variable cost and increases the shareholder’s value (Cybo-Ottone & Murgia, 2000).

Conceptually, economies of scope are similar to the economies of scale. Economies of scope relate to the reduction of the average cost for firms producing different products. There are two types of economies of scope. The first is associated with revenue while the second is associated with cost. Firms achieve cost scope economies from offering more products from the same fixed cost incurred in offering products as a single firm (Huizinga et al., 2001). Revenue scope economies are based on cross-selling to existing customer base. Economies of scope in the banking sector’s mergers and acquisitions are narrow. A large number of studies have not identified a strong link between scopes of economies and banking products. Measuring economies of scope is challenging mainly due to benchmarks required for each product offered by firms. Banks offer an array of products. As a result, it is challenging to measure economies of scope in the real world (Bliss & Rosen, 2001).

Efficiency of management

As with many firms, banks are under ownership of shareholders and management of managers. One of the main objectives of managers in banks is to maximize shareholders’ wealth. Efficiency in management results in an increase in shareholders’ wealth. Since the objectives of shareholders contradict that of managers, mergers and acquisitions are some of the ways that shareholders minimize agency problems. Mergers and acquisitions form a solution to agency problems as they can threaten the stability of employment or by acquiring more experienced managers that may increase revenue, cut cost and pursue unexploited opportunities. Under the agency theory, poor management can be reflected by a decline in efficiency. Hence, large efficient banks acquire smaller efficient banks to improve efficiency and increase shareholders’ value (Focarelli et al., 2002).

Market power

Market power is a major motivation behind mergers and acquisitions in the banking sector. Mergers and acquisitions have a positive effect on market power as large firms can effectively compete and influence the pricing of products. The main sources of market power are product diversity, market segment and barriers to entry. Given the nature of the banking sector, there is a significant opportunity to take advantage of market power. The United State’s banking sector is highly regulated giving operating firms the ability to control prices.  Mergers and acquisitions provide relatively high gains to banks. The banking sector is most common markets for mergers and acquisitions (Wheelock & Wilson, 2000).

Risk diversification 

Banks are involved in mergers and acquisitions in order to realize risk diversification. Mergers and Acquisitions provide a lower level of risk under the supposition that the cash flows of each firm in the merger and acquisition is designed to be negatively correlated.  Under this assumption, a firm that faces financial problems should be able to compensate the losses.  Risk diversification can be achieved either by geographical diversification or by product diversification. The theory of risk diversification states that banks should be able to face to shrink risks when undertaking new product lines whose gains lack correlation to the firms’ existing product gains. Geographical diversification and product diversification should be conducted under the assumption that gains from financial instruments issued in diverse locations are likely to have reasonably adverse or smaller correlation. The reduction of risk is not always a guarantee consequence, and it could have smaller prospects as it is greatly associated with the nature of the newly chosen venture. It happens due to the fact that two firms could enter into segments having little skills and know-how simultaneously. It is important that new practices are highly observed hence creating further costs. As a whole, the lack of know-how and the additional costs would have the reverse effect on the banks (Houston & Ryngaert, 1994).

Reductions tax obligation

Reduction of tax obligation for mergers and acquisitions is finished successfully when there is a formation of wealth if the two entities tax obligation is lesser than the total of the individual bank’s tax obligation. Accounting procedures are important in creating a lower level of tax obligation (Neely, 1987). Buyers have the capacity to counterbalance any future gains that were created by the two businesses with the accrued losses of the target company. Also, future tax obligations may be minimized with the help of the target firm’s unused tax credits. Additionally, under the accounting rules, the consolidated statements must present the acquired firm’s assets, not in their book value but their market value.  In this way, it will be more likely to minimize the value of the assets by decreasing the taxable income. Lastly, the firm’s merger or acquisition transaction should be classified as a tax-free reorganization if it is planned properly.  In the United States, the IRC provides a tax exception for a stock-for-stock transaction carried out with the purpose of restructuring a firm (Peristiani, 1997).

Impact on Revenue 

Mergers and acquisitions have the ability not to only impact the cost of a firm but also to potentially increase the income. Revenues of banks emanate from the sale of products and services to customers and so a larger number of customers to generate higher revenue. The product diversification offers the ability to banks to serve a wider range of product lines to afford a single shopping experience to the customers.  Therefore, there are two methods that banks can enhance their revenue streams. They include attracting new customers and offering more products to the same customers. Similarly, the increase in the market share and geographic diversification also attracts a larger group of customers due to the increased exposure of the banks (Ramaswamy, 1997). When bank customers pay high fees, it positively impacts on revenue. On the other hand, the market power of the combined firm can provide an opportunity to fine-tune the fees. The overall larger size of the combined firm is likely to provide the ability to serve a wealthier class of clients which will provide more income. According to literature, mergers and acquisitions of banks may increase banks franchise value for their shareholders. There are various regulatory matters that need to be considered during mergers and acquisitions.  Regulatory hurdles often appear before a merger and acquisitions are consummated. In the United States, the federal government promotes the “pre-filing” process that is useful in addressing questions. Such processes reduce enhance the formation of mergers and acquisitions (DeLong, 2001).

Non-maximization motives

Most motives in mergers and acquisitions are aligned to maximizing shareholders wealth. However, there are other motives that influence merger and acquisition activities. A major objective of managers is to boost their own personal wealth, often tied up to position and salary. Managers desire to attain human needs. They also strive for achievements. Such achievements might be achieved through mergers and acquisitions (Hawawini & Swary, 1990). More extensively, during mergers and acquisitions, the effect of a manager’s reward is of great significance. After a reconstruction activity, a manager might be forced to leave or accept less responsibility when his services are no longer required.  Hence, a manager may have to make a choice between shareholders ’objectives and his own objectives. One the other hand, a manager might gain a greater reward or more responsibility that result to an increase in salary.Various studies have found a positive relationship between the size of a firm and a manager’s wage. The size of a firm also potentially increases the exposure of the business to the media. Being a manager of a firm with a high level of exposure is likely to increase the power and status of the manager (Vander, 1996).

The market believes that larger companies acquire smaller ones. Under the impression, a large bank has a lower chance to be the target in an acquisition. As a result, a merger and acquisition might be designed by the management team so as to increase the size and consequently their job security. To be protected from a potential hostile takeover, managers might prefer a defensive acquisition as a first step to avoid potential loss of position. The argument is supported by negative findings on the effects of mergers and acquisitions. In the case or a reported drop in shareholders’ wealth, the merger and acquisitions could have been motivated by the objectives that acquirer’s management team had. The government also influences mergers and acquisitions conducted by firms. The government encourages mergers and acquisitions without taking into consideration shareholders’ Wealth.  It is evident that governments undertake the safety net for banks. For example, governments enhance mergers and acquisitions particularly during the crisis to allow an alliance of troubled firms. A government may also bail out a distressed bank to avoid collapse or closure (Focarelli & Pozzolo, 2001).

Impacts of mergers and acquisitions in the banking sector

Financial performance and profitability

Financial performance is the measure of several factors that translate to the achievement of financial goals.  The financial performance measures the performance of a firm in terms of financial returns. Financial performance can be determined by calculating different ratios before and after a merger or acquisition. The comparison of two ratios in different periods helps determine the performance of a firm after a reconstruction. Such ratios may include earnings per share, price earnings ratio or return on equity or assets. Earnings per share measure the amount of net income earned by a share of outstanding stock.  The figures show the amount of money each share of stock would be allocated if all of the profits were distributed to the outstanding shares in a particular financial period. Higher EPS is preferred to lower EPS ratio. A lower ratio means that a firm is less profitable as it has less profit to distribute to existing shareholders. A firm with lower EPS has less cash available to finance growth and operations relative to investor’s ownership stake. It also means that a firm is more likely to pay fewer dividends or make share buybacks in future. In the long term, the company is likely to produce lower profits. All these factors negatively impact the ownership stake (Zollo & Singh, 2004).

Price earnings ratio evaluates the market value of a stock relative to its earnings. It measures the number of times that a firm’s earnings per share are covered by its current market price. A high price-earnings ratio indicates that a firm has a strong market position.  When pre-merger and post-merger earnings per share are calculated, it helps in determining what a stock’s fair market value should be in relation to its future earnings. Entities with record high price earnings per share are expected to yield high dividends in future. Accordingly, these firms also expect to issue higher earnings in future as a result of appreciating stock in future.  The fair market value of a stock is influenced by various factors including demand and investors’ speculation (Amihud et al., 2002). These factors may increase or decrease stock price over time.  Higher price earnings ratio shows that the firm’s shares have more demand among investors.  The ratio also helps determine how much that investors are willing t pay based on its recent earnings. Overall, higher ratios indicate positive prospects and investors are willing to pay more for this firm’s stocks. A lower ratio in post-merger or post-acquisition price earnings ratio indicates the unwillingness of investors to pay a lower price for their stocks as they do not anticipate higher performance in the future. In such a case, a merger and acquisition have a positive effect on the firm (Amel et al., 2004).

Mergers and Acquisitions have an impact on Banks profitability. The net income tax or net earnings of a bank may change either positively or negatively. Analyzing and interpreting banks financial data has resulted in different findings on the effects of mergers and acquisitions on banks. A positive effect on profitability may be a result of a cost reduction that arises from operating economies. A merged firm reduces or avoids overlapping facilities and functions. The resulting consolidation of management functions including research and development, marketing also reduce operating expenses. There are other factors associated with mergers and acquisitions that may lead to increased shareholders value and higher profits. Other factors remaining constant, mergers and acquisitions lead to high profits and increase in shareholder’s value (Hannan & Rhoades, 1997).

A merger allows a firm to expand or diversify its marketing externally and internally. When a firm cannot grow externally due to lack of managerial or physical resources, it can grow externally by joining its operations with another firm through mergers and acquisitions. Mergers and acquisitions may help in the acceleration of the pace of a firm’s growth in a convenient and economical way (Avkiran, 1999). Internal growth necessitates the development of operating facilities and activities such as marketing and research. However, mergers and acquisitions involve cost. If a firm pays an excessive price for a merger, external growth could be expensive.  To have a positive effect, the benefit of a merger or acquisition should not exceed the cost of acquiring or combining the two firms for a company to realize shareholder’s value.  In practice, managers of acquiring firms may pay an excessive price for the acquisition of a target firm to satisfy their urge for a large size of a firm and high growth (Altunbaş & Marqués, 2008).

The definition of success of mergers and acquisitions may vary,  but any  merger and acquisition that does not enhance shareholders value and interest cannot be deemed as a successful. A long-term decline in shareholder wealth of a merger and acquisition can be termed as a failure in the combination process.  The success of a reconstruction can be measured by the core competencies generated to enhance value or create value.  It can be measured using different parameters including competitive positioning that arise from product differentiation or cost leadership and other parameters such as market attractiveness. In the series of studies conducted over a long period, researchers have not clearly demonstrated that merger or acquisition active firms improved their profitable or experienced higher stock prices after the reconstruction activities. Some researchers have expressed financial performance of firms in terms of income generated from operation after deducting all expenses. There are firms that have sound acquisition records (Rhoades, 1993).  Their targets are analyzed and carefully chosen, and they hardly engage in competitive auctions. What these firms have in common is a strategic approach to mergers and acquisition. In the United States’ banking sector, the big four banks are products of mergers and acquisition deals that have been conducted along the way. Bank of America, Wells Fargo, Citigroup and JP Morgan Chase Bank are a combination of more than thirty-five separate firms. Even before the financial crisis, banks have a long history of mergers and acquisitions deals. Among the four, Citigroup has had the smallest number of deals. However, one of the big deals, in particular, led to the firm’s current state. Successful acquisitions are part of a long-term strategic process that is designed to contribute towards overall firm growth.  Banks involved in these arrangements attract opportunities to fully exploit other tax advantages, increase leverage and utilize tax shields.  Evidently, strategic mergers and acquisitions have a positive effect on banks (Goldberg et al., 2000).

Method

Research approach

A quantitative research methodology was used for the purpose of this study. Quantitative research attempts to answers a question through mathematical models and analysis. A quantitative research follows defined dictated by models so as to completely answer questions, to collect evidence and to produce results that are not predetermined.

Research design

The researcher adopted a descriptive survey design to conduct the study. The study design was appropriate as the researcher needed to collect adequate data as necessitated by the research problem.

Sample

Three banks that have undergone mergers and acquisitions in the last six years were selected. There have been various major acquisitions that have taken place in the United States. The population under study comprised of 3 banks that had merged or acquired between the years 2011 and 2014.

Sampling

Data gathering is an important step in a study. It is, therefore, necessary to select a method that captures relevant and sufficient data to arrive at a conclusion. A researcher may adopt probability or non-probability techniques as effective methods of sampling. The researcher employed purposive sampling as the data sampling method. The method of selecting data as well as how data is captured necessitates sound judgment. Purposive sampling is one of the forms of non-probability sampling in which the verdict concerning the participants is based on different criteria. In this research, the sample of respondents comprised only of banks having undergone mergers and acquisitions. The choice of the sample was based on the capacity to contribute to data both in terms of relevance and depth. The purposive approach used in sampling is characterized by intrinsic bias. The level of bias leads to its efficiency as only respondents that fit a certain criteria participate in the study. Selecting the method was primary to the quality of data that to be gathered. The selection of a small sample size added credibility to the sample as the potential sample was too large.

Data collection

Data was collected using open-ended questionnaires. The researcher also obtained financial statements for the period before and after the activity. Questionnaires were dropped in the institutions leaving adequate time for managers to fill study questions.  The questionnaires were then collected from the respondents for analysis. Financial statements were obtained from the firms or online. Financial statements allowed for comparison between the performances of the banks in the pre-merger or pre-acquisition period and post-merger and post-acquisition period.

Data analysis

Data collected was analyzed using SPSS. A co-efficient of correlation was obtained to establish the relationship between dependent variables and independent variables. A multiple regression model was used in the analysis of data:

ROE = a + b1SV + b2Pr + e

Where:

ROE = Return on equity,

SV = Shareholders’ value,

Pr = Profit

a = Constant

b1 = Coefficients of the shareholders’ value.

b2= Bank’s profit respectively

Results

This study was carried out on the mergers and acquisitions that took place between years 2011-2014. The study focused on bidder and combined firms leaving out target firms.  The period in which restructuring took place seems to have been influenced internal and external factors such as competition and advancements in technology. The results of the study revealed that the banks showed high post-merger or post acquisition profits.  The profits before restructuring were considerably lower compared to the profit after merger and acquisition activities. Merger and acquisition activities were between 2011 and 2014. The years were selected to allow for comparison the immediate year after the merger and acquisition. The availability of financial information for the period was also a factor taken into consideration during the selection of mergers and acquisition.  The period of merger and acquisition was important in determining the stage in which bank was in the process.  While very young mergers and acquisitions are likely to undergo teething problems, this was not the case with mergers and acquisitions in the United States banking sector.

Discussion

Financial performance

Financial performance was measured through changes in net profit of combined entity before and after restructuring activities. The results show that all banks recorded an increase in net profit. The researcher also sought data on the return of capital. Return on capital before merger and acquisitions were obtained. The data was compared to the return on capital after merger and acquisition. The results show that 90% of the merged banks increased their net profit and returned on capital. 8% of respondents indicated that the reconstruction did not have any impact on the net profit and return on capital. 2% indicated that a merger or acquisition had a very low effect on the two factors. On the effect of mergers or acquisitions on return on capital,  5%  of the participants  indicated that there was no influence,  20% indicated that there was low influence while 65% indicated the influence was high. The remaining 10% of the respondents indicated that the influence of merger or acquisition on return on capital was very high.On the effects of mergers or acquisitions on the shareholders’ value, a significant percentage agreed that the restructuring activity led to an increase in the prices of shares with 10% more strongly agreeing. On the other hand, 5% disagreed. The remaining portion neither agreed nor disagreed. On the increased demand for shares, respondents agreed that the merger or acquisition is increased demand for shares.

Model analysis

A multiple regression model was used to determine the effect of independent variables on the dependent variable. The dependent variable was performed on the dependent variable in terms of shareholder’s value on mergers, return on capital, and synergy of mergers, profitability and operational efficiency. What the R-value arrived at was 0.697. The figure represented the sample correlation, hence indicating a high degree of correlation.

Regression statistics

Multiple R 0.69701      
R square 0.66154      
Adjusted R square 0.66154      
Standard error 0.11031      
Observations 13      
         
ANOVA        
  SS MS F Significance F
Regression 2.16501 0.27760 1.16444 0.03481
Residual 4.76009 0.13809    
Total 6.9251      

Regression coefficients

The regression model ROE = a + b1SV + b2Pr + b3Sy+b4OE+ e was employed in determining the causal effect of the independent on dependent variable.

  Coefficients Standard error t-stat
Intercept 2.5502 0.1391 2.4080
Return on equity/profitability 0.2056 0.1550 1.0047
Shareholders value 0.1879 0.01101 1.9887
Synergy values 0.2489 0.0047 1.9573
Operational efficiency values 0.3310 0.1296 0.8867

The resulting model is ROE= 2.6+0.19SV+0.21Pr+ 0.25Sy+0.33 OE. Accordingly, shareholders value causes 19% change in return on equity. The banks’ return of equity increase causes an increase in shareholders’ value. Profitability arising from mergers and acquisitions causes 21% increase in return on equity. Synergy associated with mergers and acquisition causes 25% change in return on equity. Operational efficiency causes 33% change in return on equity. A 2% change represents change caused by other factors not included in the model.

Findings

Study findings show that mergers and acquisitions have a significant effect on Return on equity and profitability, Shareholders value, Synergy and Operational efficiency.  Mergers and acquisitions have allowed banks to achieve these benefits as the pressure to achieve efficiency and economies of scale increases. Mergers and acquisitions are attractive forms of improving efficiencies and economies of scale through the reduction of operation costs.  Other factors that are unaccounted for, such as advancement in technology have contributed to mergers and acquisitions. The benefits that result from mergers and acquisitions allow merged firms to expand areas of operations both within and outside borders.  Results show an increase in financial performance as measured through changes in net profit of combined entity before and after restructuring activities. It is also evident that banks record an increase in net profit after restructuring activities. Data show that mergers and acquisitions have a positive effect on Return on equity, return on capital after merger and profitability.

Conclusion

Banks mergers and acquisition activities have involved well-performing large banks acquiring smaller financially sound banks to improve efficiency and allow for growth through scale.  Every firm has a reason to proceed to mergers and acquisition in the banking industry. However, all firms have a common purpose to value maximization. Individual firms often consolidate in order to achieve a larger market share and greater efficiency through merger and acquisition deals. Even before the financial crisis, banks have a long history of mergers and acquisitions deals. Many researchers and academicians have focused on the causes of mergers and acquisitions in the banking sector. Literature studies do not provide clear evidence on whether banks involved in these reconstructions yield any gains. Previous studies are unclear if mergers and acquisitions result in the effect of mergers and acquisitions. This study contributes to the body of knowledge on mergers and acquisitions in the United State’s banking sector.

Recommendations

Firms undertaking mergers and acquisitions should carefully analyze and chose the firm that is more likely to result in strategic advantage. What successful firms have in common is a strategic approach to mergers and acquisition. In the past, mergers and acquisitions have not always produced positive returns. Sometimes, they have unfavorable outcomes particularly when transactions are not strategically executed or planned.  The acquiring company needs to identify various risks and business considerations. Projected cost savings may not materialize for various reason including unforeseen credit issues at the target, management incompatibility between the involved firms, poor employee morale, and other unanticipated adjustments.  Additionally, the firms involved in this form of arrangement may face challenges in integrating different operating systems leading to elevated operational risks. The findings of this study provide key stakeholders insights upon which they can base their decisions. The study sought to determine the effects of mergers and acquisitions in the banking sector of the United States

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