2. CHAPTER NINETEEN Mergers And Acquisitions: Managing The Process
The purpose of this chapter is to understand why the financial services industry undertakes so many mergers each year and to determine what legal, regulatory and economic factors should be considered when the management of a financial services provider wants to pursue a merger.

3. Motives Behind the Rapid Growth in Bank Mergers
Profit Potential
Risk Reduction
Rescue of Failing Banks
Tax and Market-Positioning Motives
Cost-Savings or Efficiency Motive
Mergers as a Device for Reducing Competition
Other Motives

4. Merger Motives Identified By Bank Executives
Quality of Management
Profitability (Return on Assets)
Efficiency of Operations
Maintenance of Market Share

5. Most Important Goal of Any Merger
The Most Important Goal of Any Merger Should Be to Increase the Market Value of the Surviving Firm.

6. Impact on Earnings Per Share
Generally Speaking Shareholders of Both the Acquired and Acquiring Firm Will Gain If:
1. Bank with Higher P/E Ratio Acquires Bank with
Lower P/E Ratio
And If:
2. Combined Earnings Do Not Fall After the Merger

7. Merger Premium
A Merger Premium is Paid if the Acquiring Bank’s Shareholders Receive More Than the Current Market Price for Their Stock

8. Exchange Ratio
The Number of Shares of Stock Offered By an Acquiring Bank for Each Share of Stock of the Acquired Bank

9. Dilution of Ownership
Dilution of Ownership Occurs When the Acquiring Bank Offers an Excessive Number of Shares to the Acquired Bank Shareholders. Often the EPS Will Fall Below its Original Level for the Acquiring Bank When This Happens.

10. Characteristics of Target Firm to Consider
The Bank’s History, Ownership and Management
The Condition of Its Balance Sheet
The Bank’s Track Record of Growth and Operating Performance
The Condition of Income Statement
The Condition and Prospects of the Local Economy
Competitive Structure of the Market Area

11. Other Characteristics of the Target Firm to Examine
The Comparative Management Styles of the Merging Organizations
The Principal Customers the Targeted Bank Serves
Current Personnel and Employee Benefits
Compatibility of Accounting and Management Information Systems of the Merging Organizations
Condition of the Bank’s Physical Assets
Ownership and Earnings Dilution Before and After the Proposed Merger

12. Purchase of Assets Method of Purchasing Another Bank
A Method of Carrying Out a Merger in Which the Buying Company Purchases All of the Assets of the Acquired Firm

13. Purchase of Stock Method of Purchasing Another Bank
A Method of Consummating a Merger in Which the Acquired Firm Exchanges its Equity Shares for the Stock of the Acquirer

14. Bank Merger Act
First Major U.S. Law to Bring Merging Banks Under Federal Supervision, Requiring Government Approval to Merge with or Acquire Other Banks

15. Under the Bank Merger Act
Merger Must Be Approved By Principal Regulator
National Banks – Comptroller of the Currency
State Member Banks – Federal Reserve
State Insured Banks – FDIC
Regulatory Agency Must Give Top Priority to Competitive Effects
Mergers with Anti-Competitive Effects May Be Approved if it Can Be Shown That There Are Significant Public Benefits Such As Providing Convenient Services or Rescuing a Failing Bank

16. Herfindahl-Hirschman Index
Measure of Market Concentration
It is the Sum of the Squared Market Share for All Banks in a Specific Market Area
Department of Justice Guidelines
Postmerger HHI of Less Than 1800
Change in HHI of Less Than 200

17. Factors that Get In the Way of Merger Success
Poor or Ill-Prepared Management
Mismatch of Corporate Styles or Cultures
Excessive Prices Paid for Mergers
Failure to Take Into Account Customers’ Feelings and Concerns
Lack of Strategic Fit

18. Keys to Merger Success
Acquirer Must Start By Evaluating Its Own Financial Condition
Must Have Detailed Analysis of Possible New Markets
Must Establish a Realistic Price for Target Firm
Afterwards Combined Team Must Direct Progress Towards Consolidation
Must Establish Communication Between Senior Management and All Employees
Must Create Communication Channels to Promote Understanding of Why Merger Took Place and Likely Consequences of Merger
Should Create Customer Advisory Panels to Evaluate and Comment on Merged Bank’s Image and Products