year to date for banking mergers and acquisitions activity, with
$330 billion in deals, up 73 percent on 2006 figures and over
double 2005. A new report from VRL KnowledgeBank* looks at the key
developments of industry M&As since the turn of the century –
and what we can learn from them.
As the global bank mergertrend accelerates, it becomes increasingly important to evaluate
issues such as the estimated and actual synergies achieved, the
critical success factors in achieving these results, and the
outlook for M&A both in the wake of the current credit crisis
and over the longer term.
Judged by actual M&A outcomes, a mixed profile emerges. Few
disaster stories such as those experienced in the 1990s have
occurred in recent years. And typical synergies of 20-30 percent
for domestic and 10-20 percent for cross-border deals have been
both estimated and achieved.
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On the positive side, clear improvements have been made in the
target selection process, planning the merger, and post merger
integration. As banks become more experienced in M&A, they are
devoting more professional resources to these critical functions,
demanding ownership of the planned synergies, ensuring that a
single CEO (not a federal leadership) executes the merger, and
publishing the outcome of their planned synergies. More complex
deals, such as cross-border acquisitions, have been successfully
executed and now account for over half of bank M&A
transactions.
But while banks have become more skilled at integrating IT systems
in a single market, however, experience in actually exporting a
domestic system to other markets has had only selective success.
Offshoring and outsourcing have been widely used to reduce costs,
but not all have achieved the desired results.
Impact on shareholder value uncertain
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By GlobalDataThe actual impact on stockholder value for the buyer remains
uncertain, primarily because the merger valuation model still calls
for most – if not all – of the total synergies to be paid away
under normal circumstances to the seller. Academic studies based on
stock prices and performance metrics before and after the
transaction have long dismissed bank M&A – in particular
cross-border transactions – as adding at best only marginal value
to the buyer’s owners. One recent study of mergers by 17 European
banks actually estimates the total return on invested capital at
8-9 percent, marginally below a typical cost of capital.
On balance, the mixed
M&A record of almost all major bank acquirers would appear to
indicate that success is largely a function of buying the right
target at the right time. In addition, that success or failure may
be established only after many years. In very general terms, banks
from developed markets have had more success in buying into less
sophisticated markets like Latin America and Central & Eastern
Europe (CEE) than in highly competitive developed ones such as the
US and EU.
Indeed, the effective takeover of CEE banking systems by EU banks
is a rare example of ownership transformation, although in Asia and
other markets local regulation has effectively enabled local banks
to resist such an invasion. The overall trend in regulation has
been to break down product and geographic barriers, although there
are re-regulation trends such as consumer protection.
Diversification deals such as bancassurance and fund management
have often been undone when the forecast benefits fail to
emerge.
Looking to the future, bank M&A in the context of the 2007-8
credit crisis is most likely in the short term to take the form of
‘mercy killings’ as well-capitalised and highly regarded banks buy
up their weakened brethren. Over the longer term, however, the
former sellers’ market will return, with acquirers competing to buy
up a limited number of attractive candidates. Private equity firms
have added considerable professionalism to the acquisition process,
yet their actual deal track record has been mixed.
M&A will create ever larger and more complex banking entities,
and many interviewees have begun to question their ability to
manage such entities successfully. There is, thus, a preference in
many cases for smaller, fill-in transactions or re-shaping the
existing portfolio of businesses to match management’s core
competencies.
By far the most significant individual trend since 2000 in banking
transactions has been the growing importance of cross-border deals.
Whereas in the early 2000s there had been a relatively steady
minority of cross-border transactions, the period 2005-2007 has
seen a virtual explosion of international M&A – culminating in
2007 with the unique ABN AMRO break-up, the largest bank
acquisition transaction to date.
In 2007, due solely to the ABN deal, cross-border deals reached a
historical high of 51 percent of the total in value against a
modest 15-20 percent in the period 2000-2004.
Actually tracking the outcomes – at least for the merger period –
of bank mergers has been a most frustrating experience for outside
analysts. The author’s 1999 survey of 33 banks found only a
minority – roughly one-third – who actually tracked these results,
much less reported them to outside observers on a consistent basis
over a period of years.
In addition to estimating annual synergies, a 2007 Deutsche Bank
study also attempted to quantify returns on these transactions.
Deutsche Bank estimates returns on invested capital (ROIC) from
public data as well as analysts’ estimates of earnings over the
three year merger period.
A number of assumptions
While the Deutsche analysts have been obliged to make a number of
assumptions on earnings levels as well as the impact of disposals
and reinvestment, the aggregate results are most informative. All
M&A transactions during the relevant period recorded by all 17
banks are analysed in the study.
Over the seven years through to 2006, total investment in M&A
by the bank sample had produced an estimated return on invested
capital averaging between 8 and 9 percent over the three year
merger period.
Against an assumed cost of capital of 10 percent, this merger
investment was, therefore, mildly dilutive in aggregate. In the
peak M&A year of 2000, the sample had invested 18 percent of
its capital in mergers and acquisitions. Analysis of this data
indicates that returns – both positive and negative – influenced
overall outcomes.
A variety of academic studies of bank M&A have been carried out
in recent years to measure both the outcomes of mergers (in terms
of cost savings and impact on profits) as well as stockholder value
added by the deals.
In 2007, a comprehensive analysis of these studies was carried out
by De Young et al. Some of the key conclusions are:
• cost and profit improvement as a result of mergers analysed until
the mid-1990s was ‘elusive’ – in other words modest.
• the consensus of so-called ‘event’ studies (which evaluate the
stockholder reaction to deal announcements) in the 1980s and 1990s
was that the target’s stockholders earned strong positive returns,
while the bidder’s investors received negative returns. The
combined gains were “insignificant”.
• on the other hand, such studies since 2000, at least in Europe,
have demonstrated both efficiency gains as well as value
enhancement for stockholders. Thus over 60 percent of the 98 major
EU bank mergers reviewed by a major study of deals between 1985 and
2000 generated overall positive returns. Evidence from US
transactions is less positive.
• ‘focused’ deals – between similar banks (such as retail
institutions as opposed to bancassurance transactions) generally
produce more positive returns.
Growth, size and success
The long-running takeover of ABN AMRO by the RBS-Santander-Fortis
consortium, pitched aggressively against a lower (but friendlier)
offer from Barclays, was not only the largest bank acquisition of
all time but also hostile and a break-up as well – and showed the
lengths some banks and their CEOs will go to in pursuit of growth,
size and success.
The problem is that – notwithstanding the fact that many merger
benefits take years to filter down to the bottom line – not all
three of these variables go together.
Yet as long as investors demand double-digit earnings growth as
well as double-digit ROE, there will be an irresistible trend
toward bank consolidation.
*The above is a very brief extract from a new report published
by VRL KnowledgeBank called Bank Mergers and Acquisitions: The
Lessons of Experience. Written by Steve Davis, a highly experienced
banking consultant, the report looks at banking industry merger and
acquisition trends since the turn of the century, examining in
particular the lessons that can be learnt both from the successful
and not-so successful deals. It includes a number of case studies.
For more information, contact Shouvik Sen on +44 (0) 20 7563 5615
or at shouvik.sen@vrlknowledgebank.com
