AN ANALYSIS OF SUBSEQUENT PERFORMANCE OF BANKS AFTER

CROSS-BORDER MERGERS AND ACQUISITIONS FROM 1987-2007 IN THE

EUROPEAN UNION

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 TABLE OF CONTENTS
ABSTRACT 1
TABLE OF CONTENTS 2
CHAPTER I INTRODUCTION 3
1.1. Background of the Study 3
1.2. Statement of Problem and Research Objectives 5
1.3. Research Questions 5

CHAPTER II LITERATURE REVIEW 6

2.1. Mergers and Acquisitions in the Banking Industry in the European Union 6
2.2. Determinants of the Mergers and Acquisitions in the European Banking Industries 7
2.2.1. Capitalisation 8
2.2.2. Operating Performance of the Target 8
2.2.3. Different economic climate and Governmental regulations 9
2.2.4. Industrial Concentration 10
2.2.5. Bank Size 10
2.2.6. Management Incentives 11
2.3. Mergers and Acquisition in Cross-border scale and Banking Efficiency 12

CHAPTER III RESEARCH METHOD 14

3.1. Research Methodology 14
3.2. Research Approach 15
3.3. Sampling Approach 15
3.4. Research Instruments 16
3.4.1. Data Collecting Instrument 16
3.4.2. Data Analysis Instrument 16

CHAPTER IV INTERPRETATIONS OF THE DATA AND ANALYSIS OF THE RESULT 17

4.1. Characteristics of the Data 17
4.2. Analysis on the Data Validity 17
4.2.1. Normality Test 17
4.2.2. Autocorrelation Test 18
4.3. Presentation of Statistical Analysis Result 19
4.4. Analysis of the Result 20

CHAPTER V CONCLUSIONS AND RECOMMENDATIONS 23

4.1. Characteristics of the Data 23
4.2. Analysis on the Data Validity 23
LIST OF REFERENCES 25
APPENDICES 28

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 CHAPTER I
INTRODUCTION

1.1. Background of the Study

The European Banking Industry had undergone drastic change over the past few decades, marked by
the period of economic expansion, economic unification and most recently: the economic recession.
Restructuring process are highly prevalent during the course of the last two decades as the European
banks started to expand through deregulation and disintermediation while the technological
advancement and globalisation further intensifies the competition in the European Banking Sectors
(Berger et. Al, 1999).

It is important to notice that the mergers and acquisition activities in the banking industry mostly
possess two main characteristics in which the acquiring entity would agreed to pay higher price than
the reservation price of the bank which was established by the shareholders; and that such agreement
do not conflicts with the government authorities to the point that the government decreed that the
takeover is prohibited. It is interesting to further notice that there are subtle differences between the
mergers and acquisitions between European and US banks which may somewhat creates distinguishing
properties in the mergers and acquisition process in Europe .

In the United States, there are subtle emphases on the potential of the acquiring entity to improve the
target acquisition’s economic value beyond the economic value which are offered by the current
management of the respective bank. Accordingly, the emphasis is also supported with the consideration
and focus of the acquiring entity to exert additional considerations over the incentives of the target
managements, in order to ensure that they support the acquisition process. Subsequently, going with
this definition and characteristics explained above, it is reasonable that the target banks are mostly
categorised as underperforming banks, which are mostly possessing small economic value. This
characteristic of acquisition is actually justified with two main considerations. First of all, it is easier
for the acquiring entity in order to fulfil their emphasis and objective in improving the economic value
of the target. This would subsequently creates further benefits for the acquiring entity, as it would be
able to obtain premium easily through the newly improved current value of the target to its former
shareholders
However, this situation is rather different for the mergers and acquisition case within the European
Banking Industry, with the consideration that the regions of the European Union were formerly
constituted from different governments and each government may possess their own banking policy.
Some of the European Union member states are more focused in creating their national giant banking
corporation instead of pursuing and facilitating the creation of a single, unified financial market (ECB,
2000). This decision is based on the consideration over the possibilities that the considerations in
economic issues do not impose serious impact in the creation of these banking institutions.
Previous studies which focused over the cost and return ratio such as Lanine and Vander Vennet (2007)
further implies that there are differences in regards to the limitations and management aspects which
may affect the overall corporate value. A good example would be the limitations on the reduction of
human resource redundancies through employee layoffs. This condition would subsequently reduce the
potential for the European acquiring entities in order to reduce their costs through the elimination of
redundant costs caused by ineffective management policies.

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Accordingly, the changes in the landscape of the European banking sectors is highly contributable to
the industrial restructuring, developed through constant mergers and acquisition among European
banks, which is also intensified through the unifications of the financial service providers all over
Europe. European authorities had also intended to enhance the banking consolidation to further include
the pan-European dimension through several supportive programs developed in the 1990s, starting
from the introduction of the single market program in 1992, up to the introduction of Euro as regional
currency for most European Nations.

In the earliest development of the single market program in 1992, the banking groups in the European
Union responded by engaging and focusing themselves to conduct mergers and acquisitions amongst
domestic European banks. Campa and Hernando (2006) argue that this behaviour is contributable to the
intention of these domestic European banks in order to answer the increasing challenge from increasing
degree of competition caused by the rise of globalisation. This would of course, conflicting with the
proposition of the European authorities which had the objective of establishing Pan-European banking
network, thus preferring the consolidation to take place between the cross-border European banking
institution. Accordingly, Vennet (2002) reported that there are only small scales of inter-European bank
mergers throughout the 1990s. In this time period, there are more than 2150 cases of mergers and
acquisitions between European credit institutions. However, out of this number, more than 1800 M&A
cases are conducted in national scale whereas most of the remaining cases of M&A occur between
European financial and banking institutions.

In order to counter this issue, the European regulators had changed their priorities to further reduce the
prevailing regulatory barriers which may hampers the processes of conducting cross-border banking
consolidation. This decision showed better, more favourable result, as the European Central Bank
reports that there are increasing tendencies of the European Banks to conduct cross border merger and
acquisition deals in 2008 in both quality and quantity of the mergers. This is also expected to be the
case in the future European Banking industries; with the presence of legal measurement which justifies
the greater integration of European retail banking markets. Generally, the period of the 2000s indicates
that there are concentrated trends in the local banking markets, as well as the intention of the industry
in order to engage in strategic expansions which would be useful in order to receive greater
geographical market scale through the integration of the European Economies.

Accordingly, cross border bank mergers and acquisition is caused by several complex reasons, one of
them being the attempt of the bank in order to diversify the country risk which they may assume when
solely concentrating their market into a particular country (Amihud et. Al, 2002). Under the assumption
that there are no perfect correlations between the income flows between the different geographical
locations, then this risk diversification would yield greater degree of success. However, there are
arguments that geographical diversification may not always yield favourable benefits. Especially for
the European Zone (where macroeconomic convergence is prominent due to the Eurozone program)
which possesses common monetary policy and possessing a consolidated system of their governmental
budgets through the Stability and Growth Pact, geographical diversification may not yield very
effective results and diversification benefits for European banks which conducts the M&A within
Eurozone. This position is further asserted by the arguments of Danthine et. Al (1999), who specifically

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outlined that European bank diversification would not be able to provide better benefits in comparison
to M&A activities of European banks in their home country. This argument is justified based on the fact
that European countries as of today possess great degree of sectoral diversification, which would
subsequently causing diversification throughout domestic banks in their respective country of origin, as
long as these banks had been able to conduct and expand their operations into a national scale.
Accordingly, this would explain the reason for the lack of cross border merger and acquisitions of the
European banks in the 1990s. However, deregulations may also be able to induce favourable
proposition which may tempts the European banks to take the opportunities to expand their reach
outside their home country into other European countries, as what evidently happened in the 2000s.
This would subsequently raises interesting question in order to identify the extent of benefits which
may be experienced by the European banks through these mergers and acquisition processes and to
discover whether the claims in the previous researches that the mergers and acquisition between
European banks are still unable to provide better benefits than the mergers and acquisition in between
European banks in national scale, even after deregulations had been performed by the European
Authorities.

1.2. Statement of Problem and Research Objectives

Based on the explanations presented above, it can be concluded that the European Bank possess a
sectorally diversified system. This system would subsequently amplify the diversification of the
domestic banks and their available facilities, according to these national banks’ respective scale and
scope of operations. In the 1990s, this condition had been strongly argued as the main cause of lack in
cross border mergers and acquisition between European banks. However, the recent attempts of the
European authorities had produced deregulations which are used to foster the cross-border mergers and
acquisitions between different national European banks. The conclusions reached by the previous
researches which justified that there are increases in the cross border mergers and acquisitions volume
between the European banks would lead to hypothesis which stressed out that these cross border
mergers in European banking industries had been perceived as favourable by the managements. As
such, this research is intended to conduct testing over such proposition by analysing the subsequent
performance of European banks after the cross-border mergers and acquisition in the European Union.

1.3. Research Questions

In order to solve the research problem presented above, the researcher would attempts to provide
thorough and complete solution in a systematic structure through by answering the following research
questions:
 What are the main motives of the cross border merger and acquisition deals in the European
Banking Industry?
 Are there any improvements of the banks’ performances after the cross-border bank mergers
had taken place?

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 CHAPTER II
LITERATURE REVIEW

2.1. Mergers and Acquisitions in the Banking Industry in the European Union
The increases in size of the international banking group as well as the increasing degree of cross border
presences of the European bank throughout the continents serve as good evidences that the banking
sytem which prevailed in the European Union is have been highly consolidated. This consolidation of
banking system cannot be separated from the structural changes within the European Financial sectors
and subsequent deregulations which have been implemented by the European Union authorities; both
of these aspects had paved the way for the European banks in order to increase their overall size and
operational scope through cross-border mergers and acquisitions.
Accordingly, the decade of 2000s is marked with subtle decreases for the amount of credit institutions
throughout Europe as mergers and acquisition are conducted between financial institutions within both
the national and international boundaries. Aside from domestic consolidations, cross-border mergers
also made up a significant part of the consolidation, the research remarked by Allen et. Al (2005)
indicates that almost 70% of the mergers and acquisition case in the European Unions are cross border
acquisitions.

The continuous consolidation of the European banking system in either domestic or cross border scales
indicates two different conditions. First of all, national scale consolidation in European banking
industry had indicated that there are efforts of some members of the European Union to create a large-
scale financial institution which may serve as a flagship company as major international player. Such
idea means that the flagship company is now required to possess extensive resources and of course,
prominent presence in national scale. To fulfil this objective, most of the projected flagship company,
under the permit of the national government, would acquire smaller credit institutions to expand their
presence and subsequently increasing the concentration level in the local banking markets (Cabral et.
Al, 2002).

With the continuous increases of concentration caused by the increased consolidation in the national
scale, concerns over the anti-trust issues had started to be considered as a concerning problem. As such,
the latest development of consolidation within the European Banking industry strongly encourages the
European banking and financial institutions to search for alternatives beyond their national border.
Accordingly, it is hoped that the presences of large scale, flagship projected national banking institution
may become an attractive proposition to conduct cross-border merger and acquisition. Until today
however, there are no indications that the consolidation of the between cross border banking industry in
Europe had not yet shows any indication that it may lead to the formation of unified European financial
institutions, which had been the main desire and objective of the banking deregulations throughout the
European Union. Apparently, the size of the target in cross border scale does not inhibit significant
variation when compared to the size of targets in national scale acquisition. Altunbas et. Al (1997)
remarked that in cross-border mergers, most of the acquirers would position themselves as minority
owners in comparison to the domestic deals, where they commonly pursue the position of the main
shareholder. By far, Luxemburg possess the greatest channel of cross border banking all over Europe

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It is interesting to note that cross-border consolidations conducts are conducted only in particular
European regions, such as BENELUX until the mid 2000s; yet it is also uncommon to see Eastern and
Central European banks being acquired by the Western European banks, given that most of them
experience banking crises and somewhat unstable economic climate, especially after their
independency from the Soviet Union (Pasiouras et. Al, 1997). It is not uncommon that these
underperforming banks from the Eastern and Central Europe to become the primary targets of
acquisition by the foreign banks. The corss border acquisition is further enhanced with the privatisation
processes and increases in the membership of the European Union. Indeed, the presences of new
members of the European Union further highlights the cross border banking issue in Europe, in the
sense that these new members would undoubtedly be required to adhere to the membership policy of
the European Union and this would of course, exposing themselves into the deregulation of the banking
industry which are imposed by the European Union, in attempts to unify their banking and financial
system.

Most previous researches regarding the mergers and acquisitions of banking in Europe such as
Hernando et. Al (2008) and Lepetit et. Al (2004) stresses out that the increasing cross border financial
corporate consolidation is in line with the final objective of the European Union in order to achieve
unification of the financial system. Yet unlike the banking mergers and acquisitions in the US, there are
lack of amounts of studies which deeply and devotedly discuss about the nature and primary motivation
of the mergers and acquisition processes in the European Banking System in a specific manner, hence
most of the determinants and motivations are rather generalised.

There are also previous research which focused towards the economic outcome of the mergers and
acquisition based on the stock market returns and financial ratios of the involved party before and after
the mergers and acquisition process had been conducted. Previous studies which was conducted using
the sample of mergers and acquisition case and involves at least an European bank as either the target
or the acquirer, revealed distant result from one another in regards to the characteristics and pattern of
acquisition (Piloff, 1996). There are arguments that a common pattern within the merger and
acquisition of European banks against the traditionally-encoutered mergers and acquisition pattern is
prevalent; in which the target banks generally possess positive, significant rate of abnormal return and
the acquirers’ abnormal return rate is not significant (Neely, 1987). Although when this is measured
using the weighted average returns of the firms after the merger and acquisition process, it is revealed
that the returns may behave differently in regards to its significance, as the cross border’s positive
returns is relatively insignificant whereas the domestic acquisition indicates significant, positive
correlations. This common view had been challenged by the research of Beitel et. Al (2003) who
outlined that the nature of the acquisition (be it domestic or cross border), do not significantly affect the
weighted average returns between the target and the acquirer. Given that there are also several possible
variables and determinants which may affect the weighted average returns.

2.2. Determinants of the Mergers and Acquisitions in the European Banking Industries
Perhaps the most prevailing reason for the cross border mergers and acquisition activities in European
Banking Industries would be the inherent desire of the European Union to obtain a single financial
market. This had been previously attempted by the implementation of single financial market services
and the unification of their currencies. By obtaining financial integration, the European Union would

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be able to obtain better economic growth. Furthermore, the integration also contributes in order to
facilitate the members of the European Union in order to obtain integrated monetary benefits which are
readily accessible in an unified, financially integrated market system.

Most of the literatures which discussed about the motives regarding the mergers and acquisitions within
participants of the banking industries mostly reflect on how problem in controls is contributable in
motivating the mergers and acquisition activities between banks and this is particularly attributable to
the target bank. In European region, there are several reasons as of why European banks would prefer
to conduct mergers and acquisition, aside from the hypothesised benefits obtained through the
deregulation presented above. All of these factors would subsequently be listed and discussed as
follows:

2.2.1. Capitalisation
One of the main reason for acquiring a bank or the key factor of a bank to be considered as an attractive
target would be the capitalisation degree of the respective bank. Relationship between desirability and
capitalisation rate had long been a wide subject of debate in previous researches. There are arguments
which suggested that there are positive relationships between the capitalisation rates of the bank against
its likelihood to be acquired in the near future. Zollo (1997) described that this argument is centred
upon three main considerations: first of all, the managers of banks which possess greater capitalisation
ratio are generally assumed to operate below their actual profit potentials since they are relatively not
pressured to pursue greater degree of earnings. Another argument such as those presented by Altunbas
and Marques (2008) would be rested upon the consideration that under the assumption that high
capitalisation degree indicates the lack of capability of the bank in order to manage its assets
diversification, then more banks with capitalisation degree will sounds more attractive for acquirers
which possess better degree of diversification. Finally, banks with greater capitalisation rate would
undoubtedly be the main target for acquirers which are pressured by the authorities to increase their
capitalisation. In the other hand, there are also arguments which highlights the negative relationship
between both variables; especially if the capitalisation is considered as the measurement of managerial
efficiency and management capability, thus in this situation, better capitalised bank would appear to be
unattractive in the eye of the potential buyers as the potential gains from the better management is
relatively smaller in comparison to the banks which has lesser capitalisation rate. It may also be
interesting to note that the acquirers may be more interested in poorly capitalised target, under the
rationale that they will be able to maximise the magnitude of their performance gains after the merger
had occurred, in comparison to the costs which are incurred to secure the gains through the acquisition
of these poorly leveraged banks.

2.2.2. Operating Performance of the Target

As it has been briefly stated within the introduction, another principal motive which motivates the
acquirer to purchase banks would be to improve the current efficiency of their acquisition target.
Accordingly, such idea can be readily accomplished in case that the target bank’s performance is not
satisfactory or even, considered as underperforming. Given this condition, then the performance
indicators of the target bank would commonly enlist the explanatory power towards the likelihood of
the respective bank to become the main target of acquisition. Under this sense, then banks which
possess lower degree of profitability or exhibiting high degree of inefficiency would seemed to be more

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attractive to be purchased by the acquirers (Vennet, 1996).
However, despite of this consideration, it would be wise, to reflect back on the principle of risk and
return to actually assess this issue. While it is true that these underperforming banks would provide
better chances for improvement, it is important to notice that underperformance, in financial terms, is
also synonymous with greater degree of risks, especially in case that the main cause of this
underperformance rested in the unfavourable composition of liquidity and asset structure. In such case,
then it is better for the acquirer to actually identify and solve the problem rather than acquiring the
underperforming bank, as the risk is now presumed to be greater than the return. Therefore, it can be
considered that the performance indicators of the bank should be considered as a relevant priori which
may explain the acquisitions.

Particularly in the US, there are strong signs of positive correlations between banking efficiencies
against the likelihood of the bank to be selected as an acquisition target, regardless of the type of the
acquirer (Hannah and Wolken, 1989). However, it seemed that such proposition cannot be equally
applied in case of the European banking industries, where inefficiencies are not directly related as the
primary parameter of acquisition.

2.2.3. Different economic climate and Governmental regulations

The reflections upon the study which was conducted by Molyneux et. Al (1996) revealed that mergers
and acquisition activities between European banks can be motivated by the desire of the banks in order
to reduce expansion barriers, such as the regulations, information transfer and opportunity costs. This
finding is further justified from the analysis of the merger and acquisition cases in Molyneux’s papers,
in which when a sample of cases in 1995-2000 are compared, there are distinguishing patterns which
discerns the motivation of mergers in European Banks based on their scope of mergers. Domestic
mergers and acquisitions of European banks are mostly motivated by the banks’ attempts to enhance
their cost efficiency processes or over the considerations to reduce their costs which may incur during
expansions. However, different motive of earnings diversification was discovered as the main
motivation for the cross border mergers and acquisition case.

Differences in regulations and national government policies may also motivate the banks to conduct
cross border mergers and acquisition. As exhibited by the findings of Lenine and Vennet (2007)
regarding the motive of cross border merger and acquisition from the Western European banks to banks
in Central and Eastern Europe. In reflecting to this issue, it may be useful to also consider the presences
of arguments which states that another motivation for conducting the cross border mergers and
acquisition lays upon the disparities of market and economic structure between the nations members
enlisted in the European Union.
While the European Union itself is generally considered as an advanced economic region, it must be
noted that there are disparities between the economic conditions within its member nations and that the
region is actually consisted of several member nations which still, to some extent, exclusively
enforcing their national regulations and constitution. Western European region had long been
considered as advanced economic regions, whereas some of the Central and most of the Eastern
European countries do not possess the same level of economic advancements, especially for the former
members of the Soviet Union. Such disparity would create a rift of the economic value between the
Eastern European banks against the economic value of Western European banks. This circumstances

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can also be linked towards the proposition of the acquisition benefits and objectives which are
prevailing in the United States, where underperforming bank are mostly becomes the target and the
main objectives is to obtain premium through improving the value of the acquired banks (Hawanini and
Swary, 1990). Actually, such argument and proposition are rather reasonable; considering the close
similarities of the structure of the banking and financial service industry between the US and the
Western European countries, thus it is to be expected that similar objectives are shared in the process of
acquisition, although it may be important to contemplate that this reason and principle may not be
shared between banks in Eastern European region which in this case, serves as the main target of
acquisition.
Difference in economic structure and economic advancement would subsequently causing differences
in governmental policies. Reflecting to the previous discussions regarding the two primary prerequisite
in the merger and acquisition processes between banks, it is clear that for ascertaining the success of a
merger and acquisition between banks, the deal should be authorised and permitted by the local
government. With lesser degree of economic advancements in the Eastern European nations, then it
will be relatively easier for the banks from Western European countries to establish and expand their
operations by acquiring the banks in the Eastern European regions.

2.2.4. Industrial Concentration

Concentration in the banking industry will also affect the decision surrounding the acquisition; this is
based on the consideration upon the impacts from the deals towards the intensity of competition in the
market. Consequently, Ismail and Davidson (2005) proposed that this would affect the attractiveness of
the prospect in acquiring the bank as investment, not to mention that in some circumstances, the
antitrust authorities would certainly forbid a merger and acquisition case in order to balance the
competition.
Given such condition, then it is highly possible that there will be differences in respect to the influence
of concentration of the target bank’s business between the domestic and cross border scale, considering
that there are potentials that the reaction of the authorities which supervise the domestic competition
would be more focused in the competition-concentrated market. This is different from the
circumstances surrounding the cross border banking merger and acquisition, in which competition
authorities may not severely challenge the merger and acquisition activity (Garcia, 2007). Moreover,
there are chances that the concentration will have positive impact towards the conditional probability of
the cross border acquisition, assuming that the main reason of the oversea acquirers to invest would be
motivated by the availability of higher margins, which significantly characterise the quality of
concentrated markets. However, despite of this theoretical framework, there are no evidence which
could ascertain that the competitive environment is an important variable which determine the selection
of acquisition target by the acquirers, nor that there are definitive conclusion regarding the actual nature
of the correlations between these variables. Depending on the focus and sample market, there may be
different results which are exhibited, considering that there are differences in economic condition,
authoritative structure and subsequently, differences in the banking concentration.

2.2.5. Bank Size

Bank size will somewhat affecting the acquisition decisions of the acquirers and depending on the
intention of acquisition, size may become a deciding factor in the merger and acquisition planning. In
the acquirers’ general perspectives, smaller banks may be preferred instead of larger scale banks, based

11
on the idea that smaller banks’ operations are relatively simple in nature and it can be easily integrated
into the existing operations of the acquirers. Moreover, this perception is actually in line with the
consideration over authorities and issues which may exert additional considerations of the authorities in
rejecting the merger and acquisition scheme, as smaller banks are relatively mild in term of authority’s
supervision.
However, larger bank scale is more preferred in case that the acquiring organisation is intended to
obtain immediate source of market power, as such acquisition would bestow the bank with immediate
economies of scale, which would be accumulated slower at higher cost when the acquirer decided to
conduct acquisitions over a series of small acquisitions. In this respect, it may be useful to note that
there are also arguments which outline the concept that post merger integration is harder to be achieved
in case that the size of the target is similar or even equal than the acquirer.

2.2.6. Management Incentives

It must be noted that the managements and personnel in the target banks would undoubtedly be affected
by the process of mergers and acquisition. In relation to the common characteristic of the target bank
(which is mostly characterised in negative ways of having lesser degree of performance against the
acquirer), then it is very possible that the managers and existing executives of the target bank would be
negatively affected, as another characteristic of mergers and acquisition subsequently ruled out that one
of the first step to achieve better effectiveness is to reduce redundant costs and most commonly, this
was done by reducing the composition of the current human resources. In short, it is not uncommon to
see that the managers of the target banks lose their position, demoted or having their executive
authority reduced because of the merger and acquisition process (Datta et. Al, 1991).
This conflict of interest is actually common and still persisting in most of the mergers and acquisition
case. Accordingly, it may discourage the managers of the target banks to support the idea of having the
mergers and acquisition be conducted, even though the takeover deals would be able to maximise the
shareholder’s value; this would also be the main reason as of why the acquirer should pay close
attention over the management incentives during the takeover bid.

Specifically, Hadlock et. Al (1999) discussed the importances and significances of different variables
such as the structure of ownership, composition of the board of directors as well as the prominent
characteristics of the key management personnel, which may serves as proxies to the target bank’s
management incentives. Hadlock’s discussion compared all of these variables against the likelihood
that the bank would be acquired in the near future. The result of the research outlined that the banks
which possess greater degree of management participation have lesser potentials to be acquired.
Moreover, the significance is higher in case that the merger and acquisition case inhibit the potentials
for the managers of the target companies to have their positions altered (such as mutation, demotion or
dismissal) after the acquisition process. When this presumption is for the role of management
incentives in acquisition process is specifically tested against the proposition that banks which have
poor performance has greater chances to be selected as acquisition target, it is revealed that strong
management presence and control function over the underperforming bank may also affecting the final
decision of the acquirer to acquire the bank. Therefore, there are arguments that the findings are in line
with the entrenchment hypothesis which hypothesised that the management teams of target companies
possess great degree of significance in influencing the final outcome of the mergers and acquisition,
and that they have the position to block attempts of the acquirer to purchase the company. In case of the

12
banking industry in the European region however, there are subtle organisational adjustments during
the merger and acquisition phase, hence the management resistance are not highly persisting in the
mergers and acquisition case of banks throughout Europe. This is one of the reason as of why the
merger and acquisition activities had gain prominence and rapidly develops after the deregulation had
took places in the beginning of the 2000s.

2.3. Mergers and Acquisition in Cross-border scale and Banking Efficiency

Based on the explanations provided above, it can be generally concluded that the main driver for
consolidation process is the deregulation in both geographical and functional matter, something which
had been clearly exhibited in the Europeean region, especially after the establishment of the Second
Banking Directive of 1989, which specifically address the issue of geographical restrictions through the
introduction of single banking license and the concept of controls by the home control. This principle
and regulatory framework had been effectively implemented for all members of the European Union by
1993. It is important to outline that while the modifications of regulations are necessary in order to
ensure smooth cross border mergers and acquisition, it does not necessarily fit as the primary
determinant.

Instead, it would be useful to reflect the arguments that there are other obstacles which may hinders the
cross-border merger activities amongst banks and each of these obstacles may differ in nature. One of
the most commonly encountered issue would be the problem in regards to the corporate governance,
especially those which are related to the mergers and acquisition issue or the ownership structure which
may hinders the successful acquisition. Particularly in European Union, which actually consists of
several different countries with their own legal system and taxation approach, regulatory barriers may
also become an issue; while this issue had been lessened with the recent deregulation, there are still
national policies to be considered.

There are also hypothesis and arguments that merger and acquisition practises in European regions so
far actually reflecting the presence of problems regarding efficiency. This argument was justified by the
research by Berger et. Al (2000) who outline that the limited scope of cross border banking mergers
and acquisition in Europe is a sign that there are problems regarding the efficiency; this may be caused
by language difference, cultural and organisational structures in each of the national scale banks which
becomes the target of acquisition by the foreign acquirers. There are also considerations over the
presence of assymetric information towards the considerations for cross border mergers and
acquisitions in which the market structure would be questioned. In some happenstances, assymetric
information may turns out to be the barrier of entry for the mergers and acquisition.

Previous researches regarding mergers and acquisition had mostly outline the classic arguments
regarding the positive effect of the mergers and acquisition in terms of improving the efficiency of both
firms after the consolidation had taken place. This were mostly discussed using two general methods:
the comparative studies which compares the bank’s performance before and after the consolidation; and
the event studies which are concentrated on the impact of the announcement of mergers towards the
price of shares of the consolidating companies.

There are general theories and arguments based on assumption which highlighted that the anticipated

13
effects of future profits of the consolidated companies can be estimated by analysing the changes over
the combined market value between the acquirer and the target bank. Under the assumption that the
financial market is effective, then the reaction from the stock market may serves as a good indicator in
order to predict and anticipate any changes of performance caused by the merger and acquisition. There
are also empirical research which tests this assumption and theory in Europe, Cybo-Ottone and Murgia
(2000) for instance, concluded that the performance of the acquirer’s stock in the capital market against
their acquisition target inhibit significant positive conditions during the time when the mergers and
acquisition is announced. It is interesting to note that this findings are very different for most of the
cases of mergers and acquisitions within the banking industries in the US.
However, it is very important to outline that the research findings by Cybo-Ottone and Murgia was
limited to the study of banking mergers and acquisitions which are prevalent in the European national
scale. In case that cross border consolidation of European banks is analysed, there are no significant,
positive market revaluation, thus further justifying the arguments that there are barriers of consolidation
in regards to the efficiency, when cross border mergers and acquisition is conducted.

14
 CHAPTER III
RESEARCH METHOD

3.1. Research Methodology

Basically, there are two main general research method approaches which are mostly adhered by
researchers of different disciplines, these research methods can be selected from either qualitative or
quantitative research approach. Both research approaches posses distinctions from one another, in
regards to the approaches which are used in terms of the data collection, data analysis, along with the
interpretation of the results. However, it is also not uncommon for researchers to combine both of these
research approaches in order to obtain better perspective towards the research case or receiving better
conclusions regarding the case using completed assessment approaches which are offered through the
combination of both research approaches. This is done under the consideration that solely resorting to
either one of these approaches may not yield satisfactory results since there are other variables which
may also be enlisted to better explain the research result.

Under the consideration of the topic in this research, the researcher would like to consider the
application of the mixed research approaches in which both research approaches are combined between
the quantitative and qualitative research approach, with emphases on the quantitative research method.
The researcher believed that the combination of both research approaches would yield better results on
the analysis, especially considering that the data is structured in numerical orders which requires the
adoption of the quantitative research approaches, whereas the result of the quantitative research
analysis could be further enhanced by enlisting the usage of theoretical analysis and reflections over the
past studies in order to provide wider scope of discussion and analysis to provide a more
comprehensive picture about the issue for the readers.

The quantitative research methods are generally associated with the conduct of empirical investigations
which are done under a systematic manner in order to address particular social phenomena. Basically,
the main objective of this social study is to develop, applying or analysing particular mathematical
model and theories which are constructed in regards to the phenomena being discussed. For this reason
and inherent characteristic of quantitative research approaches, Balnaves and Caputi (2001) remarked
that it is not uncommon for the quantitative-based researchers to enlist the usage of statistical and
mathematical models in order to assess and analyse the principle in quantitative research which is
centred amongst the usage of mathematical computation.

Furthermore, Creswell (2003) also stressed out that since one of the core elements in the statistical
models is the mathematical approaches, then it is important to pay more attentions towards the process
in measuring the variables within a research as the central process and key considerations within the
quantitative research. Such consideration is based upon the notion that such emphasis would be able to
provide fundamental linkage towards the empirical observation and the mathematical expressions
which would ultimately allows the researcher to quantitatively express the relationship within the
variable. The selection of the quantitative research approach had been widely applied in many
academic disciplines and social sciences which may include but not limited to psychology, political
science, sociology and economics or even qualitatively associated disciples such as anthropology and
history. Considering that this research can be enlisted as a research in economic discipline, then the

15
applications of quantitative research approach is reasonable and valid.

In most of the social science researches, the quantitative research approach is generally distinguished
from the idea of qualitative approaches in the considerations over the philosophical positivism which is
adhered by the researcher, along with the enlistment of historical statistics data, this would creates
distinguishing features as the qualitative research would enlist primary research data obtained directly
from observation as the source of data, whereas the quantitative research would mainly resorting to the
usage of secondary data. Furthermore, considering that qualitative research methods would mostly
produces data based only to a particular case which is currently analysed whereas solely resorting to
this method would most likely rendered the research conclusions as nothing more than sole hypotheses,
the quantitative research method is actually able to provide confirmation about the correct hypothesis
out of several hypotheses which had been formulated by the qualitative research approaches. This
justified feature would be the main considerations for the researcher to be more focused on the
quantitative research approaches as the primary focus, while enlisting the qualitative research approach
in order to provide justifications on the results and conclusions reached through the quantitative
analysis.

Accordingly, the quantitative research approaches, along with its subsequent results would be further
explained and discussed using the materials which are obtained through library researches to provide
better arguments and justification of the results, while providing the readers with theoretical framework
which may provide explanations regarding the result of the research.

3.2. Research Approach

This research will apply the usage of event study research approach in which the subsequent
performance after the cross bank mergers in the European Union is analysed within the estimation
period of 60 months after the announcement date of the mergers or acquisition, which will help in
determining the semblance of the abnormal returns to shareholders; or whether the mergers and
acquisition may contributed to the betterment of the bank’s performance. The usage of event study
approach is centred on the longer event windows. This is based on the consideration that longer even
window would be able to consider the presence and significance of the bid revisions and market
competitions factors had also been accounted for. Accordingly, this will allow the researcher to include
the information leak (news, rumour and possibility of insider trading) along with the market reaction
from the information leaks which would subsequently motivate the abnormal return would be captured.
This long window event study approach had been widely applied by a number of studies concerning
the mergers and acquisition in banks’ mergers and acquisition cases, especially in identifying possible
abnormal returns. Furthermore, the usage of longer window and longer estimation period had also been
suggested by Aw and Chatterjee (2004) in order to ensure that there is enough number of observation
which would be useful to improve the statistical accuracy, especially when the time series analysis is
conducted.

3.3. Sampling Approaches

In order to obtain data which are relevant to the analysis of this research, the researcher had decided to
conduct the purposive sampling approach, in which several criteria are enlisted in order to rule out the
final sampling out of the population. Subsequently, the purposive sampling criteria are listed as

16
follows:
- Mergers and acquisition events which had been announced in the Wall Street Journal within
the period of January 1987 up to December 2007. Given that the event study consideration
rules out that the required post acquisition period of observation is located at the timeline of
60 months, hence the mergers and acquisitions which are conducted outside this timeline
would subsequently be excluded.
- The acquirer bank should be publicly listed, and having its information on share prices and
dividends consistently reported within the period of 24 months before the announcement of
the acquisitions and 60 months after the acquisition had taken place.
- The acquirer bank’s stock must be publicly traded, and that the daily data on the stock return
is readily available, along with the availability of the target bank’s stock return and market
indices.

3.4. Research Instruments

3.4.1. Data Collecting Instrument
First of all, most of the quantitative data within this research are secondary data, meaning that they are
compiled and arranged for different purposes than the objectives which prevails within this research.
Considering that the timeline of this research is rather wide, the researcher realise the necessity to
employ more than one database in the data collection process. Thus most of is based on the usage of the
compilations of financial databases such as the Bankers’ Almanac, Thompson Financial as well as
Bankscope, all of which provide a comprehensive list about the mergers and acquisitions related to
publicly traded banks, which are also available from Reuters’ database.

3.4.2. Data Analysis Instrument

In terms of the analytical manners, this research will adhere to the concept which is introduced by
Vennet (2002), which enlists the usage of regression analysis in order to investigate the impact of the
cross border mergers and analysis. This is done by enlisting the usage of several efficiency and profit
variables which could be used to identify the impact of the mergers and acquisition towards the
takeover involvement. The prevailing regression model of this research would be:
Y1 = a + b1X1 + b2X2 + b3X3 + ei,t

Accordingly, there are three variables which are used in order to measure the operational efficiency of
the banks, which is the return on asset (ROA), return on equity (ROE) and operating profit margin
(OPM), whereas the impact on the market would be measured using the stock price fluctuation,
measured through the monthly return (CSAR) from the first 60 months after the mergers and
acquisition had taken place. This research would subsequently adhere to the concept of usage of
dummy variables of Vennet (2002) where the measurements of impact are measured through the
dummy variables of the merged and acquired banks. For the reason of simplification, all of these
variables’ timely value would be averaged amongst the sample banks’ mergers and acquisition cases.

Specifically within this research, the researcher will apply the usage of statistical software in order to
simplify the process of regression calculations and to bestow the research result with greater level of
accuracy. Accordingly, the statistical software which would be used in this research is SPSS ver. 16.0.

17
 CHAPTER IV
INTERPRETATIONS OF THE DATA AND ANALYSIS OF THE RESULT

4.1. Characteristics of the Data

As it has been previously hinted above, considering that this research is intended to measure the impact
on the mergers and acquisition towards the subsequent bank performance after the mergers and
acquisition, then the researcher would enlists several measurement variables. The impact on the bank
mergers and acquisition would be measured using the cumulative standardised abnormal returns of the
banks for 60 months after the deal and the performance of the bank is measured through the usage of
several performance indicators for the bank after . Therefore, the data had been structured in the
historical monthly composition.
The definition of the variables would then be described as follows:
- Dependent Variable (CSAR)
The average cumulative standardised abnormal returns of the acquiring banks for the 60
months since the mergers commenced. Measurements are also conducted using the acquirers’
stock after the acquisition using information obtained from Yahoo! Finance
(www.yahoofinance.com). Returns are measured based on the following mathematical
formula:

- Independent Variables: Performance Indicators (ROA, ROE and OPM).

Prevailing performance indicators banks for 60 months since the mergers commenced,
measured using the average measurements on the return on assets (ROA), return on equities
(ROE) and operating profit margin (OPM) of the banks involved in mergers in acquisition for
the next 60 subsequent months after the mergers and acquisition had commenced. Average
measurements are done manually using the data obtained from Thompson Financial Database
and Bankscope (https://bankscope2.bvdep.com/ ).

Considering that there are variations of the occurrences of the mergers and acquisition, the researcher
had decided to apply monthly measurements in measuring the impact in substituting the presence of a
fixed year which is used as mutual benchmarking time, within the research time span of 1987-2007.

4.2. Analysis on the Data Validity

Considering that this research analysis is conducted by incorporating regression analysis, there are
several steps which should be taken before the data could be fully analysed using the regression
analysis framework. Commonly, the users of regression analysis should ascertain that their research
data is valid beforehand, which involves the process of enlisting several tests such as the normality and
autocorrelation test, which will also be presented in this research as follows:

4.2.1. Normality Test

Before the data can be fully employed using the regression framework, it should fulfil the assumption
that it has been normally distributed. This assumption is often considered as the primary prerequisite in
the regression analysis. Using SPSS, the distribution of the data can be observed through the patterns

18
inhibited in the scatterplot diagram. The data is considered to be normally distributed in case that its
distribution pattern follows the diagonal line exhibited in the P-Plot diagram and the distribution should
mirrors a diagonal line.
The result of the normality analysis of the research data is exhibited as follows:

Diagram 4.1
Result of the Normality Test

Based on the result of the SPSS analysis provided above, it is evident that the data is distributed along
the diagonal line and its distribution pattern mirrors the pattern of a diagonal line. Therefore, we can
conclude that the data had been normally distributed and can be further used for analysis.

4.2.2. Autocorrelation Test

Especially for the data which employs time series observation in the regression, it is important to
ascertain that the data had been freed from any potential autocorrelation which may occurs, after the
data had been confirmed to be normally distributed.
The presence of autocorrelation indicates that there are relationships between the historical data in a
single variable. Therefore, to ascertain validity, it is important to ensure that the data is free from any
potential autocorrelations. Using SPSS, the measurement of autocorrelation can be observed by looking
at the value of the Durbin-Watson, in which the data is considered to exhibit signs of autocorrelation in
case that the value of the Durbin-Watson is located outside the threshold region of -2 up to +2.
Subsequently, the result of the autocorrelation result is presented in table 4.1. below:
Table 4.1.
Autocorrelation Test
Model Summaryb

Change Statistics

Model R R Square Adjusted R Square Std. Error of the Estimate R Square Change Change df1 df2 Sig. F Change Durbin-Watson

1 .383a .147 .101 .14145 .147 3.208 3 56 .030 1.337

19
Based on the result which is exhibited above, it can be concluded that the data in this research is also
free from autocorrelation, therefore this data can be further used in order to research the impact of the
cross border mergers and acquisition towards the bank performance.
Furthermore, it is also important to outline that there is a positive relationship between the dependent
variable against the independent variable using the measurement of R 2 score, where the level of 0.147
is appointed. This indicates that the independent variable may be able to explain the changes in the
dependent variables’ movement by 14.7%, whereas the remaining 85.3% are explained through other
factors. Accordingly, the relationship between the dependent variable against all independent variables
combined altogether is considered significant, given that the level of significance of 0.03 is located
below the threshold of 0.05.

4.3. Presentation of Statistical Analysis Result

To first determine the impact of the mergers and acquisition, it would be important to enlist each of the
performance indicator measurements as the subject of analysis to measure the overall impact towards a
particular performance aspect. The relationship would subsequently be exhibited in the table presented
below:
Table 4.2
Impact of Mergers and Acquisition towards Performance
Coefficientsa

Unstandardized Coefficients Standardized Coefficients

Model B Std. Error Beta t Sig.

1 (Constant) -.718 .383 -1.872 .066

Return on Asset (Average) .091 .104 .121 .875 .385

Return on Equity (Average) .384 .449 .202 .856 .395

Operating Profit Margin (Average) .280 .510 .124 .549 .585

a. Dependent Variable: Cumulative Standardised Abnormal Returns

First of all, when the impact of mergers is measured towards performance using ROA as measurement,
it is evident that mergers and acquisition may improve the overall performance in terms of ROA,
evident with the positive beta of 0.91. However, it has no significant influence to the performance,
considering that its significance level (0.385) is located beyond the level of 0.05. This indicates that
mergers and acquisition had positive impact towards the performance when it is measured using the
asset management quality measurements based on ROA, though the relationship is generally
insignificant.
In similar manner, the regression test using ROE also indicates similar results in which positive
relationship of 38.4% is exhibited. Furthermore, the level of significance which is located at the level
of 0.395 indicated that the relationships between these variables are insignificant. Similar
happenstances also occurred when OPM is used as the independent variable, with the beta of 0.28 and
significance level of 0.585 (indicating insignificance). Accordingly, the regression function to describe
this case would be:

20
 CSAR = -.718 + 0.91ROA + 0.384ROE + 0.280OPM

4.4. Analysis on the Result

Based on the results of the statistical analysis provided above, we can conclude that the cross border
merger and acquisition activities would generally improves the performance of the bank in the
European Union. Such conclusion is based on the findings that using three performance measurement
indicator ratios, similar results are exhibited in which the mergers and acquisition had positive
relationship and impact on each of these three performance ratio measurements within the 60 months
time period, as evidenced by the significance level which are all located below the level of 0.05.

Accordingly, the findings of this research is consistent with the previous findings conducted by Vennet
(2002), that within the short period of the takeover, there are increases in profit enhancement ratio,
such as exhibited by the relationship when the impact is measured upon the operating profit margin. It
can also be hypothesised that the improvements in regards to the profit efficiency is also supported
through the findings in this research. The findings also confirms the findings which justifies that the
cross border mergers and acquisition will relatively improve the performance of the banks in a sense
that cross borders European bank mergers and acquisition would bestow the benefits through any
prevailing difference in regards to the management risk strategies which address the differences in loan
and credit.

First of all, the findings which justified that there is a positive impact and relationship between the
mergers and acquisition against the return on asset may conflicting with the previous findings that
assets differences which are caused within short-term period of the mergers and acquisition would
cause negative impact upon performance, considering that the lack of coherence within the
capitalisation, differences in technology and perhaps, any differences in strategies regarding the
financial information may cause disparities (Healy et. Al, 1992). Such findings of negative
performance in regards of asset issues after the merger and acquisition would often be justified under
the condition that both involved institutions possess different strategic orientations. Accordingly, the
findings where this research suggested that mergers and acquisitions on cross border scale may have
contributions towards the improvement of the asset management may sounds to be strange, especially
under the hypothesis that mergers and acquisitions would most likely have negative performance
towards the performance measured by assets for companies which possess different orientations in
regards to their strategies; whereas cross border banking mergers and acquisition would most likely
inherit this issue in regards to differences in their strategic orientations.

However, in regards to this issue, it may be useful to actually reflect upon the prominent characteristics
which are inhibited within the case of cross border mergers and acquisition in European nations.
Altunbas and Ibanez (2004) reported that in regards to their relative size which are measured by the
total assets, most European acquirer banks possess far greater level of asset composition, which nearly
encompass 7 times of the total assets of the target bank. Moreover, the acquirer are mostly possessing
greater degree of cost efficiency against the targets. Accordingly, Harrison et. Al (1991) remarked that
the enormous disparity in regards to the asset composition between the acquirer against the target may
render the addition of the targets’ assets as insignificant during resource allocation. In such cases of
large disparity, the acquirers are mostly able to exert greater control over the management and this will

21
also be extended to include the target’s asset management. Under this condition, as long as the acquirer
possess extensive, sophisticated asset management approaches which are now applied to the target’s
asset management approach, then the risk of performance degradation in regards to the asset
management may be completely avoided (De Long, 2001). Furthermore, European acquirers mostly
possess an inherent characteristic which confirms with the idea that the greater degree of capitalisation
differences may also be contributable in banishing the negative effect on performance, especially in
regards to the capitalisation. Inherently, high degree of capitalisation which is possessed by the target
would be greatly reduced once they have been acquired by the acquirer and this is positively related to
the magnitude of the capitalisation degree in the acquirers’ position. The larger the disparity of
capitalisation, then it will be more likely for the bank to diminish negative effect of the capitalisation
within mergers and acquisition towards assets performance (Carletti et. Al, 2002).
Generally, it can be concluded that the inefficiency and downgraded performance in banking mergers
and acquisition in regards to the assets management are mostly not inhibited in Europe, where there are
large disparities of assets composition, where adoption of the acquirers’ sophisticated asset
management style would be sufficient to banish the negative effect of mergers and acquisition towards
bank’s asset performances. Also, it is important to notice that the event window of this study may also
contributable to the findings, considering that the time span of 60 months is longer than the researches
which suggests the negative effects of mergers and acquisition upon the asset structure. Nnadi and
Tanna (2010) for instance, reported that announcement of mergers and acquisition may be negatively
perceived by the market, especially when the market tried to assess the ability of the acquirers to
implement the new management style. This indicates that the negative impact may only exist in short-
run basis. However, once the adaptation had been properly applied, then the market may perceive this
as a good signal of improvement, which would in turn, improve the overall perception in the market
(Beitel and Schiereck, 2001). This may explains the exhibit of positive relationship presented in this
research and also raise new considerations as whether the relationship between the natures of the
acquirers’ asset prominence may have profound effect towards the subsequent impact of the mergers
and acquisition to the relative performance. Similar case is also exhibited in case that a comparison is
conducted using the operating profit margin as the measurement standard.

In regards to the discussions of benefits of the cross border mergers towards the shareholder, the
findings of this research challenged the previous findings of Nnadi and Tanna (2010) who claimed that
geographical diversification in cross border banking industry may not provide rewards for the banks’
shareholder. Accordingly, it has been shown that there are positive relationships between the CSAR of
the acquirers after the merger and acquisition towards the ROE of the bank. Theoretically, this may be
caused by the fact that as the acquisition took place under the premise that the acquirer possess better
performance against the target and for such reason, their main objective would be to improve the
overall performance of their target, then it is very likely that the subsequent improvements introduced
by the acquirers would be able to bestow the bank and the current shareholders with immediate benefits
through rapid growth of their newly acquired targets (Berger, 1995). It must be noticed that for the
cross border banking merger and acquisition cases, the acquirer would be able to expand its operations
to new regions. Given that most of the European banks are characterised as having complete services
and for the same reason, do not require many adjustments in the expansion process, then such
extension would be able to provide better returns for the shareholders in the long term. While it is true
that market scepticism may initially brought negative perception to the shareholder, it may be wise to

22
reflect to the idea which suggests that such presumption and scepticism may further be reduced
depending on the scale of the acquirer. In case that the size disparity is large, whereas the acquirer
possesses good reputation in the market, then it is likely that such presumption is negated (Levine and
Aaronovitch, 1981). However, in case that similar scale companies are compared, then it is likely that
cross border mergers may not yield such satisfactory result.

Finally, the findings which indicate that there are increase and improvement over the profit efficiency
may also be contributed by the changes in the target banks’ pricing policies with the instalment of new
managerial initiatives and policies; considering that larger banks would possess sophisticated system of
the pricing and services, then one of the primary target of improvement would be the pricing system
which is adhered by the target banks (Focarelli and Panetta, 2003). This is under the sense that
profitability had long been considered as a prominent feature of measuring the corporate performance.
Furthermore, Houston and Ryngaert (1994) proposed that the presence of the new parent bank may
create spill-over which could be used in order to enhance the profitability further. Most importantly,
when the acquirer possess more sophisticated management and greater degree of market power, the
enlistment of the newly acquired target may serve as a medium to enter new markets, and if this is
combined with more sophisticated management system and pricing which is applied by the acquirer
along with their market power, it is very likely that profitability the bank in post-mergers and
acquisition period would also be significantly improved.

23
 CHAPTER V
CONCLUSIONS AND RECOMMENDATIONS

5.1. Conclusions
Generally, it can be concluded that cross border mergers and acquisition of banks in Europe would
yield improvements over the performance of the banks. Accordingly, the financial features of both
acquirers and targets in the cross border European mergers and acquisition would be similar with the
domestic European mergers and acquisition in many aspects. The main difference however, may rest
upon the size and composition of assets between both parties. Such pattern indicates that cross border
merger and acquisition in European banking industry would most likely involve a very large banking
institution, such as the “flagship banking corporation” as the acquirer which would obtain smaller, local
banks which had prominent differences in respect to their credit quality and capitalisation rate. Such
function can be presumed as functions which are affected according to the size of the parties involved
in the process of mergers and acquisition and the inherent nature of the target bank, which in this case
had slight difference in regards to its capitalisation ratio and asset composition. Generally, the abnormal
returns may be contributed to the positive impact of the merger and acquisition towards the acquirer
bank’s performance.

Accordingly, it can also be concluded that there are several inherent characteristic which is contributing
towards particular pattern of the impact of the mergers and acquisition towards the subsequent bank
performance after the deal. First of all, there are characteristics which outline great size disparity
between the acquirer against the target bank, which would subsequently banish the potential negative
impact of mergers and acquisition towards the assets performance, this characteristic is not widely
shared by the US banks, where mergers between banks with similar size are rather prominent. The
presence of the great size disparity is often inhibited when prominent banks of the West Europe started
to acquire financially-burdened Eastern (and Central) European banks, especially after the fall of
Soviet Union (Dermine, 1999). From this characteristic, then it can also be concluded that the bank size
may be contributable towards the motivations of the acquirer to acquire the target. High degree of
capitalisation in these smaller banks in Central and Eastern Europe may also motivate the bank to
consider taking advantages of diversification against different economic climate and governmental
regulations. Certainly, European Union’s deregulation plays a great part in motivating the cross border
mergers, aside from the three aspects presented above (Capitalisation degree, size, economic climate
and governmental regulations).

However, the deregulation may also turns the diversification (in regards to the industrial concentration)
as one of the primary driving motivation of the European cross-border mergers, as the national banks
are now motivated in order to look for new market to explore and considering the density of the
competition in European banking industry as of today, where the presence of foreign, non-European
banks had started to gain prominence (Demsetz and Strahan, 1997).

5.2. Recommendations
While the empirical researches which are intended to measure and analyse the case the mergers and
acquisition within the banking industry over the banking performance or its subsequent impact towards
the capital market had been commonly conducted by many academician, they are mostly concentrated

24
in the US, whereas researches which specifically address the issue in the European banking industry is
rather scarce. Also, the cause which underlines the expansion and cross border mergers and acquisition
in European Banking are rather, still generalised into the general motivations of cross border bank
mergers in a global scale, thus future research which specifically address each prevailing factors
motivating the bank mergers would be heavily suggested.
It is also suggested for the future researcher to consider conducting broader analysis by enlisting cross
border mergers between banks and non-bank financial service providers towards the subsequent
performance of the bank. Enlisting comparative study which compares the relative effect of the
domestic and cross border bank mergers against the subsequent banking performance may also be very
useful in order to obtain better perspectives to confirm the cause or identify the potential benefits which
may answer the question as of why before deregulation by the EU was introduced, domestic mergers
are far more favoured than cross border mergers.

25
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29
 APPENDICES
DATA VALIDITY TEST RESULTS
- Normality Test

- Autocorrelation Test
Model Summaryb

Change Statistics

R Adjusted R Std. Error of R Square F Sig. F

Model R Square Square the Estimate Change Change df1 df2 Change Durbin-Watson

1 .383a .147 .101 .14145 .147 3.208 3 56 .030 1.337

a. Predictors: (Constant), Operating Profit Margin (Average), Return on Asset

(Average), Return on Equity (Average)

b. Dependent Variable: Cumulative Standardised Abnormal

Returns

30
SPSS COEFFICIENT TABLE

Coefficientsa

Standardized
Unstandardized Coefficients Coefficients

Model B Std. Error Beta t Sig.

1 (Constant) -.718 .383 -1.872 .066

Return on Asset (Average) .091 .104 .121 .875 .385

Return on Equity (Average) .384 .449 .202 .856 .395

Operating Profit Margin

.280 .510 .124 .549 .585
(Average)

a. Dependent Variable: Cumulative Standardised Abnormal Returns

31
DATA COMPOSITION A (n1-n30)
Month (n) ROA ROE OPM CSAR MAP X1

1 3.56 1.2828427 0.5278427 0.26 1

2 3.18 1.205061 0.465061 -0.12 1

3 3.58 1.1484924 0.2984924 0.39 1

4 3.87 1.3606245 0.5306245 0.16 1

5 3.66 1.1767767 0.4417767 0.25 2

6 3.15 1.2262742 0.4012742 0.36 1

7 2.9 1.0494975 0.3444975 -0.19 2

8 3.22 1.0424264 0.3324264 -0.15 1

9 3.15 1.0565685 0.1465685 -0.23 1

10 3.09 1.3535534 0.5085534 0.2 1

11 3.17 1.1484924 0.4384924 0.4 1

12 2.67 1.1626346 0.4326346 0.18 1

13 2.88 1.1202082 0.3502082 -0.03 1

14 3.11 1.0212132 0.3162132 -0.09 1

15 2.94 1.0141421 0.2191421 -0.05 2

16 2.97 1.1484924 0.3684924 0.11 2

17 2.95 1.0353553 0.2803553 -0.08 1

18 3.16 1.1131371 0.3481371 0.16 1

19 3.21 1.0212132 0.3162132 0.23 2

20 3.05 1.0282843 0.2432843 0.15 1

21 3.08 1.1484924 0.3884924 -0.04 1

22 3.12 1.0636396 0.3586396 -0.06 2

23 3.33 1.0707107 0.3407107 -0.12 1

24 3.24 1.0282843 0.3132843 -0.15 1

25 3.14 1.0494975 0.2944975 0.01 1

26 3.1 1.1272792 0.3722792 0.06 2

27 3.17 1.0494975 0.3294975 0.14 2

28 2.99 1.0212132 0.2462132 0.17 2

29 3.06 1.1272792 0.3572792 0.23 1

30 3.09 1.0282843 0.3132843 0.15 1

32
DATA COMPOSITION A (n31-n60)1
Month (n) ROA ROE OPM CSAR MAP X1

31 2.91 1.0494975 0.3244975 0.11 1

32 2.95 1.0141421 0.2891421 0.19 1

33 2.88 1.0494975 0.3494975 0.17 1

34 2.9 1.0494975 0.3294975 0.09 1

35 2.97 1.0212132 0.3162132 0.1 2

36 3.04 1.0141421 0.2891421 0.01 1

37 3.01 1.0494975 0.3244975 0.16 2

38 3.03 1.0141421 0.3141421 -0.05 1

39 3.1 1.0141421 0.2991421 -0.03 1

40 3.12 1.0353553 0.3253553 0.09 2

41 3.14 1.0212132 0.3012132 0.14 1

42 3.19 1.0494975 0.3444975 0.22 1

43 3.22 1.0565685 0.3465685 0.2 2

44 3.15 1.0424264 0.3174264 0.12 2

45 3.23 1.0777817 0.3477817 0.16 1

46 3.29 1.0353553 0.3203553 0.18 2

47 3.18 1.0141421 0.3091421 -0.04 2

48 3.13 1.0212132 0.3062132 -0.1 2

49 3.11 1.0424264 0.3424264 -0.15 1

50 3.14 1.0424264 0.3324264 -0.08 2

51 3.2 1.0565685 0.3315685 0.02 1

52 3.26 1.0919239 0.3619239 0.14 1

53 3.18 1.0494975 0.3444975 0.17 1

54 3.05 1.0565685 0.3215685 0.23 1

55 2.98 1.0070711 0.2920711 0.19 1

56 2.9 1.0282843 0.3182843 -0.07 1

57 2.91 1.0141421 0.2691421 -0.14 2

58 2.87 1.0777817 0.3725129 -0.06 1

59 2.89 1.085233 0.3809119 0.05 1

60 3 1.079122 0.344142 0.18 1

1
All data value and ratios are summarised and averaged from 56 cases of mergers and acquisitions
which had fulfilled the criteria enlisted within the purposive sampling standards, described in Chapter
III (see segment 3.3.).
33