Determinants of Transaction value in Bank Mergers and Acquisitions: Evidence from the United States

Abstract

This study focuses on understanding the determinants of transaction value in bank mergers and acquisitions. The determinants of transaction value are studied by reviewing prior literature on bank merger pricing and by conducting an empirical study. In the empirical part, I analyze how different accounting-based measures as well as other transaction characteristics influence transaction value.

To date, literature on the topic has mainly focused on analyzing merger premiums. Prior research shows that premiums are dependent on target and acquirer characteristics as well as other transaction characteristics. More specifically, the evidence indicates that target characteristics such as profitability, capital structure and quality of loan portfolio influence the premium paid in bank mergers and acquisitions. This study differs from prior literature on bank mergers and acquisitions pricing as it examines transaction values instead of merger premiums.

The relationship between transaction value and value determinants is tested with OLS regression models. The sample used in this thesis covers 105 bank mergers and acquisitions where at least 90 % of shares were acquired. The mergers are completed between January 1994 and December 2017 in the United States. Furthermore, only public targets are included in the sample. The data on the mergers and acquisitions is collected from the Securities Data Company’s (SDC) Mergers and Acquisitions database. The financial statement data is extracted from the COMPUSTAT database, a market database published by Standard & Poor’s.

Transaction value in bank mergers and acquisitions is found to be dependent on target characteristics. Consistent with prior research on bank merger premiums, transaction value is associated with target characteristics such as size, profitability, capital adequacy as well as quality of loan portfolio, particularly after the financial crisis of 2007-2008. This study also provides evidence that transaction value is more dependent on profitability indicators than capital adequacy indicators.