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Bank acquisitions of security firms: the early evidence

2004; Chapman and Hall London; Volume: 14; Issue: 7 Linguagem: Inglês

10.1080/0960310042000216042

1466-4305

Aigbe Akhigbe, Jeff Madura,

Housing Market and Economics

Abstract A bank acquisition affects the combination of financial services that are offered, and the potential synergy between services. Consequently, an acquisition can affect the performance and risk of the bank. While much research is focused on bank acquisitions and other financial institutions, there is very little research on the performance following bank acquisitions of securities firms. Until recently, banks were restricted from acquiring securities firms. Thus, related research could only speculate on the effects from integrating bank and securities services, or measure the initial market response to related regulatory changes. It is found that the announcement effects when banks acquire security firms are not significant. Similar results are found for a matched sample of bank acquisitions of other banks. Second, bank acquirers of security firms do not experience a reduction in risk, offering no support for the diversification hypothesis. These results also hold when applying a cross-sectional analysis that controls for other characteristics of the acquirers. Third, banks that acquire security firms experience weaker performance following the acquisitions than banks that acquire other banks. The results may be attributed to the high level of risk of securities firms as independent entities, the high price paid to acquire these firms, and the difficulty in merging bank and securities operations and cultures. These findings do not refute the notion of beneficial synergies between banks and security firms. However, they may suggest that the favourable revaluations of banks as a result of signals about impending consolidation were excessive. Consequently, the price paid by banks for security firm targets may have been excessive, allowing a wealth transfer to the security firm shareholders before the wave of acquisitions occurred. In addition, the market may have underestimated the complications and cost resulting from the integration of security activities with banking activities. Notes 1See Travelers to Buy Salomon for $9 Billion, The Wall Street Journal, 25 September 1997. 2Kane and Unal (Citation1988) note that bank and S&L stock returns are not responsive to short rates but long rates have a significant effect (Unal and Kane, Citation1987). Following their methodology we use the returns on long-term government bonds to proxy the unanticipated changes in the interest rate index. 3The announcement period is purposely excluded when measuring long-term valuation effects so that any results pertaining to long-term effects are not clouded by the immediate market response to acquisition announcements. 4As a robustness check, the performance of the sample of acquiring banks is also compared with that of non-acquiring banks matched by bank size. These results support those using the portfolios of all non-acquiring banks.