The dominance of the US and Europe in the current global financial services landscape means that most European and American banks enter new markets outside their region through transatlantic M&As. These developments are not lost on bank CEOs, who must keep a watchful eye on competitors' strategies and assess what these acquisition moves mean to their own bank's position. With their massive increases in market capitalization due to mergers, leading banks are in a strong position to invest heavily in new products or services and to make even larger acquisitions. This would pose a significant competitive threat that would require other banks to respond.
Indeed, all acquisitions will result value enhancing unless there exists some element of market inefficiency, i.e., imperfect competition in either the product and/or labor market and/or agency conflicts. Most large mergers and acquisitions fall short of achieving the desired synergies. In January 1999, The Economist reported that study after study of past merger waves has shown that two of every three deals have not worked. And at least 50% of major mergers since 1990 have eroded shareholder returns. Reasons for failed mergers are diverse and complex, but most can be attributed to losing something: critical people, customers, market confidence. Uncontrolled costs, hidden losses, unrealized benefits, avoiding decisions, cultural barriers, and power struggles can also undermine the most promising unions.
Despite the high failure rate, M&As that succeed can pay large dividends. The most successful acquiring firms have clearly established and well-understood acquisition processes, both for ensuring good strategic decisions before the acquisition decision is made and for integrating the acquired firm once the deal is complete. This has created an interest amongst other banking firms to make a research on the M&As and the reasons behind their success or failure. But this is not that easy in many cases the acquisition has a complex effect on the Bank's value. Hence there is a need to determine methods to find whether the acquisition has resulted in value addition or not.
The objective of the study is to use event study methodology and accounting performance techniques to determine whether value was created as a result of mergers and acquisitions that created 'mega banks'. In order to analyze this problem, this study will examine stock data and charts for the five mergers of JP Morgan and Chase Manhattan Corp. (JP Morgan Chase); JP Morgan Chase and Bank One; and Bank of America and Fleet Boston; Wells Fargo & Co. and Pacific Northwest Bancorp; and Citicorp and Travelers Group Inc.
The event study methodology will utilize stock market abnormal price returns of both the acquiring and target companies from 2 years prior to the merger through to 2 years after the merger (including the announcement date), to determine if shareholders experienced an abnormal change in stock value, as well as examine the Sharpe Ratio for the merged banks. The accounting performance technique will utilize operating and absolute cash flow returns as well as returns on equity for both pre- and post-merger periods.
A Case Study of Five Mergers &