J.M. Campa and I. Hernando M&As performance in the European Financial Industry Croatian National Bank, July 2005 THE ELEVENTH DUBROVNIK ECONOMIC CONFERENCE

Campa & Hernando 2 M&As performance in the European Financial Industry  From the beginning of the 90´s, there has been a reduction in the number of banks in the UE. –1997: 9600 banks; 2003:  Concentration process mainly on a domestic scale. –UE-15: : 78% (in value) of the mergers are domestic.  Complexity in cross-border operations –ECB Report on EU-Banking Structure: Lower potential synergies and lower potential earnings of market power. –Recent Evidence: Cybo-Ottone&Murgia (2000) and Beitel, Schiereck&Warenburg (2004)

Campa & Hernando 3

4 Content of the presentation  European Financial Industry integration  Literature review  M&As abnormal return around the announcement date  Subsequent performance of M&As  Conclusions

Campa & Hernando 5 European Financial Industry Integration

Campa & Hernando 6 European Financial Industry Integration Source: Thomson Financial.

Campa & Hernando 7 European Financial Industry Integration Source: Hartmann, Maddaloni, and Manganelli (2003), ECB Working Paper 230.

Campa & Hernando 8 European Financial Industry Integration

Campa & Hernando 9 European Financial Industry Integration

Campa & Hernando 10 European Financial Industry Integration Source: JP Morgan (2004).

Campa & Hernando 11 European Financial Industry Integration

Campa & Hernando 12 Literature Review 1. M&As Transactions most likely to generate value  Evidence for USA. Mergers with better results are those with a greater ex-ante potential for cost reductions : –High Degree of Market Overlap –High cost differential between target and acquirer  Evidence for Europe points in the same direction. Most successful mergers are: –Companies with the same activities –Domestic mergers –Target with poor results

Campa & Hernando 13 Literature Review 2. International Mergers Foreign banks have higher operating expenses and lower returns than domestic banks, on average (Berger et al. 2000) Information costs are the source of segmentation in the International Financial Markets (Buch, 2002) Negative excess returns for the acquirers in international banking mergers(for ex. Amihud, DeLong and Saunders, 2002) Merger benefits materialize mainly in costs reduction. The shorter the geographical distance, the higher Efficiency benefits (Berger and DeYoung, 2001) Technological and regulatory developments: lower costs of the cross-border financial service provision (Buch and DeLong, 2002)

Campa & Hernando 14 Abnormal Returns around the announcement date  M&As announcements in the European Financial sector in  172 transactions: –96(104) deposit institutions –52(37) intermediary and financial holdings –24(31) insurance companies  Market value available for 158 transactions  120 domestic transactions and 52 international transactions

Campa & Hernando 15 Abnormal Returns around the announcement date  Abnormal returns: difference between expected and observed returns.  Expected returns (CAPM model):  Buyer, target, joint return.  Event windows: –(t-30,t-1), (t-90, t-1), –(t-1,t+1), (t-30,t+1) –(t-1,t+30), (t-30, t+30) –(t-30,t+360), (t-1,t+360)

Campa & Hernando 16 Abnormal Returns around the announcement date

Campa & Hernando 17 Abnormal Returns around the announcement date

Campa & Hernando 18 Abnormal Returns around the announcement date

Campa & Hernando 19 Abnormal Returns around the announcement date

Campa & Hernando 20 Abnormal Returns around the announcement date

Campa & Hernando 21 Subsequent performance of merged entities  Sub-sample of the completed banking mergers  66 transactions: 42 domestic, 24 international  Financial variables (Bankscope)  Return (ROE, Financial margin)  Market value  Eficiency:Operating expenses/Net income  Credit Activity: Loans/Total assets  Risk: Loan insolvency provisions or net financial result provision

Campa & Hernando 22 Subsequent performance of merged entities

Campa & Hernando 23 Subsequent performance of merged entities

Campa & Hernando 24 Subsequent performance of merged entities

Campa & Hernando 25 Subsequent performance of merged entities Differences of merger´s impact on target entities Better evolution of the financial margin when operating with different size banks. Poorer evolution of the efficiency ratio when operating with different size banks and in domestic mergers. Increase of the capitalization ratio when operating with different size banks, in domestic mergers and in the mergers that took place in the period

Campa & Hernando 26 Subsequent performance of merged entities

Campa & Hernando 27 Subsequent performance of merged entities

Campa & Hernando 28 Conclusions  The European Financial market is not well integrated in commercial banking. In Europe, the diversity of competitive and business structures is high.  There is a value transfer from the acquirers to the targets. This value transfer is higher in the case of domestic mergers.  The acquiring banks show a better financial situation than the targets, although the latter are not in a poorer situation than the sector´s average, observing an improvement in their returns from the second year onwards