Multiple Bank Mergers and Rational Foresight Simon Kwan Federal Reserve Bank of San Francisco Views are mine and not necessarily represent the views of the Federal Reserve Bank of San Francisco or the Federal Reserve System Evren Örs HEC School of Management, Paris

Research Question What differentiates multiple (serial,sequential) acquirers? –Most of the corporate finance literature on M&A treats different acquisitions by the same firm as separate events. –Authors’ try to model sequential acquirer’s search process and then see whether their predictions hold in the banking data. First Union Corp.’s 83 acquisitions under “Fast Eddie” Related papers: –Nilssen and Sorgard (1997, EER) –Gorton, Kahl and Rosen (2002 wp) –Wheelock and Wilson (2004, RFE) –Fuller, Netter and Stegemoller (2002, JF) –Klasa and Stegemoller (2006 SSRN wp)

Brief Summary A theoretical model to derive two testable implications on multiple-bank mergers: –Asset ratio(s) of subsequent mergers a positive predictor of asset ratio of current merger; and –Asset ratio of current merger a positive predictor of asset ratio of subsequent merger. Found significant effects of 2 nd /3 rd merger asset ratio on current asset ratio, and vice versa. Robust after correcting for simultaneity.

Comments on Setup Where does the merger surplus come from? –Different across mergers –May determine how surplus is allocated Existing empirical evidence: –Bidders: zero abnormal stock returns –Targets: positive abnormal stock returns –See e.g. Pilloff (1996), Kwan and Eisenbeis (1999) Mergers versus Acquisitions? –Who retains control? –Change in control upon merger? –Rational foresight is moot without retaining control

Comments on Empirical Analysis The link between authors’ Theory and testable implications is weak: –Acquisition spree mind set managers would behave differently How Ratio k,t = TA i,t / TA j,t is measured? –k th merger for the bidder or the target? –Any ordering is sample dependent. Empirical model: –Asset ratio(s) of future subsequent mergers should be a positive predictor of asset ratio of the current merger, and –Asset ratio of current merger a positive predictor of asset ratio of subsequent mergers.

Comments on Empirical Analysis The empirical model merely says that asset ratios constructed using the same acquirer are positively related. –As expected if asset ratio is driven by acquirer’s size Alternate interpretation: –Acquiring banks prefer to digest certain size targets in multiple acquisitions. Simultaneity model -- R 2 negative or zero: –Endogeneity problem not adequately solved.

Concluding Remarks Applaud the idea of distinguishing serial mergers from one-time mergers. Future research should explore the empirical differences between the two types of mergers: –Effects on shareholders’ wealth, acquirers and targets –Post-M&A performance –Market structure: in-market vs out-of-market –Organizational structure –Ownership structure –Business sline overlaps/complementarities –Payment methods