|
Article Excerpt
OF THE ROUGHLY 7,600 commercial banking organizations in the United States in 1995, a substantial number had disappeared as independent entities by 2005. Bank failures were quite rare over that period, in contrast to the situation in the 1980s and early 1990s. Thus, the vast majority of the reduction since 1995 was due to acquisitions of banks rather than bank failures. The period since the mid 1990s is also unique in that it marks the first time that geographic restrictions on the operations of banking organizations were largely nonexistent. Many intrastate restrictions on bank operations had been relaxed by the beginning of the period, and easing of interstate restrictions soon followed. A particularly important development was passage of the Reigle-Neal Act of 1994, which was fully implemented by mid-1997.
This Act relaxed previous restrictions on interstate banking operations, allowing acquisitions and mergers across state lines on a nearly universal basis. Given the large number of mergers that took place in the late 1990s and early 2000s and the unique characteristics of the time period, this study employs a large sample of independent banking organizations, observed annually, to investigate the characteristics that influenced the likelihood of a bank being acquired during the period from 1996 to 2005. Since this is the first study that uses data recent enough to include a substantial number of interstate acquisitions, it is the first to investigate whether the determinants of interstate acquisitions differ meaningfully from the determinants of intrastate acquisitions. We also employ a subsample of publicly traded banking organizations to investigate the role of managerial ownership in explaining the likelihood of acquisition.
Following Wheelock and Wilson (2000), we use a competing-risk proportional hazard model to estimate the relationships between various bank and market characteristics and the "hazard" of being acquired. In our study, however, acquisition by differing types of acquirers, classified according to the location and size of the acquirer, define the competing risks. This approach provides a natural framework for investigating the determinants of out-of-state acquisitions, since acquisition by in-state and out-of-state acquirers can also be modeled as competing risks.
An additional advance concerns the definition of an acquisition. We employ the widely accepted, but seldom implemented, standard that an acquisition occurs when there is a change in control. The use of the "change-in-control" standard means that the case of a bank holding company (BHC) acquiring an independent commercial bank or another BHC is counted as an acquisition, even when newly acquired bank institutions are not merged into an existing banking subsidiary of the acquiring holding company. Also, mergers of two banks owned by the same BHC are not counted as acquisitions, since presumably no (or very little) change in control occurs in such transactions.
The plan of the paper is as follows. Section 1 discusses the relevant literature, while Section 2 lists and discusses the explanatory variables employed in the analysis. Section 3 presents the empirical model, while Section 4 discusses data sources and procedures. Section 5 presents econometric results, and a final section summarizes the findings of the analysis.
1. RELEVANT LITERATURE
Although various past studies have investigated the characteristics of banking organizations that make them more likely to be takeover targets, none use a comprehensive sample of acquisitions defined as a change in control, and nearly all employ data for periods that precede the last 10 years.
Employing a sample of Texas banks in existence in 1970, Hannan and Rhoades (1987) report that banks that have larger market shares, maintain lower capital-to-asset ratios, and operate in urban areas were more likely to be acquired, all else equal. They do not find evidence that firms exhibiting lower profitability or growth were more likely to be acquired, all else equal. Thus, to the extent that profitability and growth indicate managerial performance, they fail to find support for the hypothesis that poorly managed banks are more likely to be acquired. Amel and Rhoades (1989), however, using a large nationwide sample of mergers occurring during the years 1978-83, do find that the lower a bank's earnings, all else equal, the more likely it was to be acquired.
Another examination of bank acquisition likelihoods was reported by Moore (1997), who based his analysis on acquisitions that transpired between June 1993 and July 1996. Like Hannan and Rhoades (1987), Moore employed a multinomial logit estimation procedure to investigate whether the relationship between the likelihood of acquisition and its determinants differs, depending on whether or not the acquiring institution is located within the market in which the target bank operated. For both types of acquisition, Moore reports that the target bank's share, return on assets, and capital-asset ratio were all negatively related to the likelihood that a bank is acquired, all else equal. The negative and significant coefficient of profitability is interpreted to be consistent with the hypothesis that acquisitions serve to transfer assets from poorly managed to better managed firms. Moore suggests that the coefficient of the capital-asset ratio is significantly negative for much the same reason, since it reflects past profitability. Only the coefficient of market concentration indicates a major difference in explaining the likelihoods of the two types of acquisition. This coefficient is significantly positive for out-of-market acquisitions but negative for in-market acquisitions--a finding that Moore suggests reflects antitrust restrictions on horizontal mergers. (1)
Moore (1997) restricted the sample to independent banks and banks owned by one-bank holding companies to avoid counting mergers among the subsidiaries of the same BHC as an acquisition. It is not clear, however, whether the acquisition of a banking institution by a BHC that subsequently allowed it to continue operating as a separate institution under the holding company umbrella was treated as an acquisition.
The most sophisticated of the large-sample studies of the determinants of bank acquisition likelihoods was conducted by Wheelock and Wilson (2000). This study uses a competing-risk proportional hazard model to investigate the determinants of both the likelihood of being acquired and the likelihood of failing (a competing risk).
The sample consists of about 4,000 banks followed over the period from 1984 to 1994. Of these, 1,380 were acquired and 231 failed at some time during the period.
That part of the paper that relates to the prospects for being acquired is of primary relevance to this study. Like most studies, the authors find a bank's capital-asset ratio to be inversely related to the likelihood of acquisition. They also find a negative relationship between the likelihood of acquisition and the return on assets, all else equal--a result often interpreted as supporting the hypothesis that acquisitions serve to transfer assets from poorer to better management. Wheelock and Wilson (2000) devote considerable effort to the construction of detailed measures of cost and technical inefficiency. They find significant negative coefficients of a measure of cost inefficiency and statistically insignificant coefficients of two other measures of inefficiency. Thus, the coefficients obtained for these inefficiency measures do not appear to provide support for the hypothesis that acquisitions serve to transfer assets from poorly managed to better managed organizations. On the whole, their findings regarding this hypothesis appear to be somewhat mixed.
As in other large-sample studies of bank acquisitions, data availability lead Wheelock and Wilson (2000) to restrict their analysis to combinations in which one chartered banking organization is absorbed into another. The authors readily note, however, that this approach raises the two potential problems noted above: combinations of commonly owned banks may be included, and acquisitions by BHCs or banks are not counted if the acquired banking institution is thereafter operated as a separate entity.
These sample selection problems are typically avoided in studies that focus on small subsets of publicly traded banking institutions, since the authors of such studies can employ data sources that provide information on acquisitions defined by the change-in-control standard. Studies that focus on the much smaller number of publicly traded banking organizations have been reported by Akhigbe, Madura, and Whyte (2004) and Hadlock, Houston, and Ryngaert (1999).
Akhigbe, Madura, and Whyte (2004) employ data on 254 acquisitions occurring between 1987 and 2001 and a matched sample of 582 institutions that were not acquired. They report that the probability of a bank being acquired is greater if it has a lower return on assets, a greater level of assets, a higher capital-assets ratio, and a higher ratio of core deposits to assets, all else equal. This is the only study that we know of that reports a positive relationship between capital levels and the likelihood of acquisition.
Hadlock, Houston, and Ryngaert (1999), using a sample of 84 large publicly traded banking organizations that were acquired during the years 1982-92 and a matched sample of 84 banking organizations that were not acquired, report no relationship between earnings and the probability of acquisition. The major focus of their study is the relationship between the ownership shares of the banking organization's management and the likelihood that the organization is acquired. The authors report a significant negative relationship...
|
