Efficiency, Value Addition and Performance of US Bank Mergers

Abstract

There is little consensus regarding the overall performance of mergers and acquisitions in the banking industry. The goal of this paper is to investigate the change in operating performance, efficiency, and value addition of US bank mergers and acquisitions after GLBA. We extend the previous research by combining all the previous methodologies used in mergers and acquisitions studies and add a new methodology, namely Expected EVA improvement. We will test whether these performance metrics yield similar results or if the performance of mergers varies depending on the measurements. We will also examine the factors that have significant impact on changes in bank performance. Our empirical results lead to the conclusion that the industry-adjusted operating performance of merged banks increases significantly after a merger. This finding is consistent with the findings of Cornett et al. (2006). We also find that the acquirer expected EVA improvement increases significantly after a merger. Revenue enhancement opportunity appears to be more profitable if there exists more opportunity for cost cutting such as geographically focused and diversified mergers. Product diversification mergers increase the industry adjusted performance more than product focused mergers. The efficiency or profitability of targets have either a positive or no effect on acquirer performance.

Keywords: Merger and Acquisitions, Diversification, EVA, DEA, Performance, US Banks

JEL Classification: G21, G28, G30, G34