1. Galia Kondova Georgiev UoH Competence Center Workshop 1 January 27, 2006, Stuttgart Bank Mergers: Do They Serve Efficiency? Evidence from the German Savings Banks Galia Kondova Georgiev Corporate Finance & Risk Management Competence Center University of Hohenheim Workshop, GENO-Haus Stuttgart January 27, 2006

2. Galia Kondova Georgiev UoH Competence Center Workshop 2 January 27, 2006, Stuttgart Summary Savings bank mergers improve performance on ave Operational scale economies are exploited Managerial inefficiencies are reduced Mergers as a reaction to external policy shocks (deregulation, privatization debate)

3. Galia Kondova Georgiev UoH Competence Center Workshop 3 January 27, 2006, Stuttgart Presentation Overview 1.Theoretical Framework 2.International Evidence 3.Savings Bank Mergers- Overview 4.Methodology 5.Empirical Results 6.Conclusions

4. Galia Kondova Georgiev UoH Competence Center Workshop 4 January 27, 2006, Stuttgart Theoretical Framework: Motives M & A Motives* Value Maximizing Efficiency Hypothesis Market Power Market for Corporate Control Non-value Maximizing Empire-building Strategy Regulation & Policy- induced Management Entrenchment * Classification following Berger, Demsetz, Strahan (1999) and Vander Vennet (1996)

5. Galia Kondova Georgiev UoH Competence Center Workshop 5 January 27, 2006, Stuttgart Theoretical Framework: Measuring Effects Operating Performance –cost efficiency –profit efficiency Share Prices (event studies)

6. Galia Kondova Georgiev UoH Competence Center Workshop 6 January 27, 2006, Stuttgart International Evidence: Efficiency Effects of Bank Mergers USA  cost X-efficiency: little or no gains in the 80s ( Berger 1992, DeYoung 1997) and modest gains in the 90s (Berger 1998, Rhoades 1998); gains for intraholding mergers (Linder and Crane, 1992)  profit efficiency: significant improvements (Akhavein et al., 1997) Europe  Cost efficiency: gains for mergers of equal size (Vander Vennet 1996)  Profit efficiency: positive impact (Vander Vennet 1996, Focarelli et al. 2002)

7. Galia Kondova Georgiev UoH Competence Center Workshop 7 January 27, 2006, Stuttgart German Savings Banks Mergers Financial Data on 489 Sparkassen over the period 1993-2003: ROE, CIR, Total Assets, etc. 141 Mergers

8. Galia Kondova Georgiev UoH Competence Center Workshop 8 January 27, 2006, Stuttgart Methodology Relationship b/n ROE/CIR and Mergers modeled as a stochastic one with an error term ε ROE/CIR=f (Merger) + ε –fails to control for factors like bank size, macroeconomic effects, bank management, etc. ROE/CIR=f (Merger, Size,Macroeconomics,Bank Management) + ε

9. Galia Kondova Georgiev UoH Competence Center Workshop 9 January 27, 2006, Stuttgart Dynamic Unobserved Effects Regressional Model A lagged dependent variable included as a regressor captures the history of any relevant determinant of, thus preventing potential omitted variable biases

10. Galia Kondova Georgiev UoH Competence Center Workshop 10 January 27, 2006, Stuttgart Empirical Results: Effect on Profitability Data Summary Statistics VariableMeanStd. Dev.MinMax ROE16.078.00039.7 Assets1.571.490.08810.65 Assets24.7010.200.008113.58 Year19932003 Balanced Panel Data, N=383, T=11

11. Galia Kondova Georgiev UoH Competence Center Workshop 11 January 27, 2006, Stuttgart Estimation Results on ROE Arellano-Bond One-step Estimates Δ ROECoefficient L.ROE 0.46 ** merger - 1.99 * merger1to3 2.26 * mergerover3 3.45 ** assets - 5.70 assets2 0.33 d95 6.13 ** d96 3.43 ** d97 1.89 ** d98 1.21 ** d99 - 0.24 d00 - 1.24 ** d01 - 3.51 ** d02 - 3.55 ** _cons 0.16 Sargan test (p-value): 0.96 Second-order autocorrelation test: 0.13 ** indicates significance at the 1 %-level * indicates significance at the 5 %-level Dynamic Model in First Differences

12. Galia Kondova Georgiev UoH Competence Center Workshop 12 January 27, 2006, Stuttgart Robustness Test Fixed-effects Estimates ROECoefficient merger - 4.01 *** merger1to3 - 0.62 mergerover3 1.76 *** assets- 1.70 ** assets2 0.16 ** d94- 4.47 *** d95- 0.43 d96- 1.38 *** d97- 3.44 *** d98- 5.16 *** d99- 7.42 *** d00- 9.41 *** d01- 12.51 *** d02- 13.90 *** d03- 10.80 *** _cons 24.16 *** Fixed-effects Model, Consistent for *** significant at the 1 %-confidence level **significant at the 5 %- confidence level, R-sq within=0.44 On average, a merger bank has a lower ROE than a non-merger bank, keeping size fixed

13. Galia Kondova Georgiev UoH Competence Center Workshop 13 January 27, 2006, Stuttgart Effect of Mergers on Cost Efficiency Data Summary Statistics VariableMeanStd. Dev.MinMax CIR63.056.8744.7086.70 Assets1.471.340.098.40 Assets23.957.980.00870.54 Year19932003 Balanced Panel Data, N=422, T=11

14. Galia Kondova Georgiev UoH Competence Center Workshop 14 January 27, 2006, Stuttgart Estimation Results on CIR Arellano-Bond One-step Estimates Δ CIRCoefficient L.CIR 0.61 ** merger merger1to3 mergerover3 assets 6.00 ** assets2 - 0.40 * d95 3.02 ** d96 2.02 ** d97 3.05 ** d98 5.19 ** d99 3.23 ** d00 4.54 ** d01 4.93 ** d02 - 0.23 _cons 0.29 ** Sargan test (p-value): 0.92 Second-order autocorrelation test: 0.68 One-sided significance test: ** indicates significance at the 1%-level * indicates significance at the 5 %-level x indicates significance at the 15 %-level Dynamic Model in First Differences

15. Galia Kondova Georgiev UoH Competence Center Workshop 15 January 27, 2006, Stuttgart Descriptive Analysis (1) Evidence supporting the scale economies motive for mergers

16. Galia Kondova Georgiev UoH Competence Center Workshop 16 January 27, 2006, Stuttgart Descriptive Analysis (2) Potential for reducing management inefficiencies Bank Size € 400mn-500mn€ 500mn-600mn minmaxminmax ave CIR53695470 ave ROE722823

17. Galia Kondova Georgiev UoH Competence Center Workshop 17 January 27, 2006, Stuttgart Conclusions (1)  A merger of savings banks improves profitability in the medium and long term  Some evidence on improvements of the cost income ratio  Management and operational scale economies (IT, lay-offs, brand name-related benefits)

18. Galia Kondova Georgiev UoH Competence Center Workshop 18 January 27, 2006, Stuttgart Conclusions (2)  Mergers triggered-off by policy shocks (financial market deregulation in EU, bank privatization discussion in DE)  Mergers as a tool for strengthening corporate governance in an industry with a severely constrained market for corporate control

19. Galia Kondova Georgiev UoH Competence Center Workshop 19 January 27, 2006, Stuttgart Thank you Feedback welcome to: kondovag@yahoo.com