Question

1.

a. What are the motives for bank consolidations (mergers and acquisitions)?

b. Suppose Bank A buys Bank B and makes its subsidiary. Would shareholders of Bank A benefit from this acquisition? Does the answer depend on the motives for the purchase?

Answer 1

a. There are three major motives for the mergers and takeovers: Synergy, Agency, Hubris

Synergy motive implies that the aggregate total return / value from the merger of two or more companies will be greater than that of the individual company. The takeovers are due to the economic benefits which result from the merger of the two companies 'resources. They also concluded that overall M&A gains are always optimistic and can therefore say synergy occurs. The agency motive suggests takeovers are taking place because they improve the welfare of the acquirer management at the expense of acquirer shareholders.

The agency motive suggests takeovers are taking place because they improve the welfare of the acquirer management at the expense of acquirer shareholders. The hubris hypothesis indicates that executives make errors in analyzing target companies, and that they indulge in acquisitions even though there is no synergy.

b. Stockholders on both sides of the merger experience changes in the value of their stock during the period directly before the official announcement of the merger if the acquiring company buys stock of the target company with cash. The target company's stockholders (the company being purchased) typically see the value of their shares rising while the acquiring company's stockholders see the value of their shares lower.

Stockholders are given an opportunity to buy stocks at bargain rates and then make substantial returns during merger negotiations. If acquisition negotiations take place the target company's stock price will rise. However, the stock price does not raise to its acquisition price the price that the acquiring company will pay per share to purchase the business. This provides an incentive for stockholders to purchase stock of the target company when it is low and then sell it after the merger is complete.

The target company's shareholders in the transaction would retain their shares after a merger if the target company's purchasing business made a stock-for-stock purchase. Stock-for-stock acquisitions effectively swap the target firm's stock with the acquisition company's stock. While the target company's stockholders retain the same amount of shares after a stock-for-stock exchange, their voting control is reduced due to the larger number of stocks remaining after the merger.