The Implication of Bear and Bull Market Periods on Merger and Acquisition Deals in the European Financial Sector

ABSTRACT

This thesis is going to analyze the implication of bear markets and bull market periods and on merger and acquisition deals in the European financial sector and the US for the acquiring and target firms and A further analysis is done on the differences between acquiring listed objectives compared to purchasing non-listed targets. The period for data collection is between 2002 and 2013 (this will cover the bear and bull market periods, before and after the financial crisis period) and this will allow the author a wide and enough time-span with which to interpret at least one bull, and one bear market.

During the period from 2000 to beginning of 2009 two apparent bear periods and one clear extended bull period can be identified. From 2001 to 2002 there was a bear state, following the dot-com bubble burst. The second bear state is the significant decline in the world market following the recent financial crisis; hence 2008 is our second bear state. The bull market in between the two periods is most in line with our definition for the years from 2004 to 2006. We exclude 2003 since this is a year of contradicting market conditions this is the same reason for why 2007 is left out. The US bear market of 20072009 lasted from 9 October 2007 to 9 March 2009, during the financial crisis of 2007-2009 then this was followed by a bull market period till 2013.

The Zephyr database is used as the source of data. From the database, which had a total of 1754 bank mergers and acquisitions, firms used in the current research were294 (60 deals were cross-border deals while 234 were private deals) and this is because the financial and stock performance of these firms could be accessed. Through regression analysis and Multinomial Logistic Regression, the event study adopted will be a statistical method as this is quantitative research.

The results indicate that there are higher abnormal returns during the announcement of merger and acquisition deals in the bear market period for the acquiring firms compared to merger deals taking place in the bull market period. However, for target firms, the returns in the bear market period are lower when compared to announcements made in the bull market period. The performance results for European bidding banks is favorable compared with those of US institutions. Thus, European bidding banks realize positive abnormal returns over the announcement period and small increases in post-merger performance in the years following a merger.

The paper is going to follow this structure. The second chapter will look into a review of the existing literature in this field. The third section will describe and explain the hypotheses. The fourth episode will look into the research techniques and methods. The fifth chapter will provide, and the sixth chapter will explain the findings and the results. The seventh chapter will present the conclusion, the recommendations, suggestions for further research and the limitations of the study.

BACKGROUNDMergers and acquisitions began in the early 19th century. Between 1998 and 1999, the number of mergers and acquisitions in the world were more than ever before. Most of these transactions were mega-mergers. Around 2000, the stock markets peaked, and there was a general decline in the number of mergers and acquisitions. When there is an increase in the prices of the stock market, this implies that there is a bull market, and, as such, firms will rush to merge or acquire other companies (Agrawal & Jaffe, 2000). However, when there is a decline in the prices of the stock market, the reverse is true.

The present mergers and acquisitions belong to the fifth merger movement. It is a movement which began in the late 90s, and one of its main features is strategic mega-mergers. One of the driving forces for the fifth merger movement has been the need to achieve economies of scale, economies of scope and market power (Andrade & Mitchell, 2001). When these three receive attaining, it becomes easier to increase competitiveness in the global markets; most mergers in the 80s were financed with borrowed money while current mergers and acquisitions get funding from corporate stocks. Currently, mergers and acquisitions have become popular as they happen on daily bases, anywhere in the world, with the primary motives being long-term growth and economic growth for the companies involved. The concept of mergers and acquisitions has been growing unmistakably and is fast becoming a corporate-strategy of the highest priority (Altunbas & Marques, 2008).

In the creation of a competitive position in the market, there is the need to develop or establish an environment which promotes and enhances sustained development. Companies which are intent on growing and expanding can do so through two ways; they can either become internally, this also gains reference as organic growth, or they can develop externally, and this is through mergers and acquisitions (Margsiri et al. 2008). In almost all transactions of mergers and consolidations, the amount paid by the acquiring firm is usually higher compared to the market value of the target company before the bid; this gains naming as acquisition premium. There are primary ways to which acquisition can acquire financing, either through stock or cash. As such, when there is a boom in the market, there will be changes in the stock exchange quotation. Consequently, this increases the number of acquisitions (Berger et al. 2004). There is also an increase in the premium paid resulting in payment changes with regards to whether it is a bull market or a bear market.

One of the most motives and reasons for mergers and acquisitions are synergy effects. In most cases, the acquiring firm pays a certain amount of money to the company that has been acquired. The difference between the amounts paid to buy a target company compared to the estimate made of the value of the company before the merger process gains terming as a premium (EU, 2007a). In a scenario where the impacts of the synergy are more than the bonus, this will increase the value of the shareholder. The underlying motive for all mergers and acquisitions is to develop and enhance the shareholder's value.

Bank Mergers & Acquisitions have gained popularity in the last decade or so. In most other businesses, the two main parties affected by any mergers and acquisitions are investors and shareholders, however, when it comes to the banking sector, there are several other parties such as policymakers, borrowers, and depositors (ECB, 2006). The banking sector plays an enormous role in impacting the economic state of any particular nation. Therefore, any mergers and acquisitions done have to gain proper planning and analysis (EC, 2005). Mergers and Acquisitions are believed to enhance the performance of the banks, mostly through target banks and synergies of banks. However, other deals made have negative repercussions on the performance of the bidder bank. There is no consistency on the effect of mergers and acquisitions on bidder bank performance. This paper will analyze the impacts of mergers and acquisitions on bidder bank performance between 2002 and 2013 and see whether the value attained creation. Analysis of stock and accounting performance will be the two parameters used.

Since 2000, the number of mergers and acquisitions has been fluctuating. Between 2000 and 2004, there was a decrease in the name of M&A globally, not only in the bank sector but all other areas. The main reason attributed for this drop was the recession and economic upheaval that hit the global economy (EC, 2005). However, after the end of the recession period between 2004 and 2007, the number of mergers and acquisitions increased yet again. At the end of the year 2007, there was another economic crisis which lasted for two years, and this subsequently led to a drop in the number of M&A transactions. From 2010 to 2013, there has been a slight decrease in the overall number of mergers (Subrahmanyam et al. 2007).

Figure 1 Number of announced M&A for all sectors (2003-2013)

Source: imaa-institute.org

Figure 2 Number of announced M&A for banks (2003-2013)

Between 2007 and 2009, there was a drop in the number of mergers and acquisitions in all business sectors. However, in the bank sector, there was an increase in the mergers and acquisitions in that period. Also, between the years 2009 and 2010, there was an increase in the overall number of mergers and acquisitions in all business sectors, however, when it came to the banking industry, the number of mergers and acquisitions decreased. One of the reasons attributed to this drop was the financial crisis that took place earlier on. The different trend in the banking industry compared to other business sectors presents a topic which needs further exploration.

Most studies show an increase in returns for target firms in mergers and acquisitions. However, as stated earlier, the effect that mergers and acquisitions have on the value of bidder firm is not consistent. Other studies have indicated that there is an increase in value; others have shown that there is a drop in the overall performance while others have demonstrated insignificant effects on the bidder firms. The reduction of costs and increase in revenue are some of the factors attributed to the positive impacts of mergers and acquisitions. The high prices of integration and, other agency incompatibility issues are some of the reasons attributed to the harmful effects of mergers and acquisitions.

Studies conducted to assess the impact of mergers and acquisitions on value creation and the performance of banks have all used different approaches and techniques. Some of the parameters used include; the reaction in the stock markets for the banks involved in mergers and acquisitions and data on accounts and financial performance. The current study is going to analyze value creation and the impact of mergers and acquisitions on bidder bank performance. Value creation and the various changes in performance levels attain measurement through the use of accounting data. Return on equity and bank performances gain comparison between the pre-and post merging. Five parameters are used as the sources of changes in the production and creating value. These five include; capital adequacy, earning diversifications, the inefficiency of costs, asset impairment and liquidity risks....