DETERMINANTS OF PREMIUMS PAID IN EUROPEAN BANKING MERGERS AND

ACQUISITIONS

Belén Díaz Díaz (∗) Sergio Sanfilippo Azofra

Departamento de Administración de Empresas

Universidad de Cantabria Avda. de los Castros s/n

39005 Santander - SPAIN Tel: + 34-942201660 - Fax: + 34-942201890 e-mail: diazb@unican.es, sanfilis@unican.es

∗ Contact author

1

DETERMINANTS OF PREMIUMS PAID IN EUROPEAN BANKING MERGERS AND

ACQUISITIONS

ABSTRACT

This study aims at analysing the determinants of the premium paid in European banking mergers

and acquisitions (M&A). This analysis will highlight the reasons for the bank M&A wave during the

1990s.

The empirical study analyses a sample of 81 European banking mergers and acquisitions from

1994 to 2000.

The results show that there are different variables that make the target bank attractive for the

acquirer, such as the percentage of equity, the percentage of loans and financial profitability. However,

geographical and product diversification have not been considered by the acquirers as a reason to pay

higher premiums. Moreover, when analysing a sub-sample of savings banks and cooperatives, it is found

that M&A deals have been used as a protection measure to avoid being acquired, since these acquisitions

aim at attaining a great size, what implies higher premiums are paid for mergers between equals, for

acquisitions of higher banks and by those who show lower growth.

Key Words: premiums, banking mergers and acquisitions.

JEL Classification: G34, G21

2

1. INTRODUCTION AND MOTIVATION

Both economic and regulatory changes have deeply transformed the financial sector in recent

years. Developments in assets markets, disintermediation, deregulation, financial innovations and the

growing technological possibilities are some of the key factors which have enhanced liberalization and

competitiveness of the sector.

Within this context, mergers and acquisitions (M&A) are considered to be the response of

financial institutions to such recent changes (Berger, Demsetz and Strahan, 1999). An increase in

transactions of this kind can be found both in the United States and in Europe during the 1990s. In

particular, the number of M&A deals carried out by European financial institutions increased from 330 in

1990 to 1,072 in 2000. On the other hand, the number of M&A deals by credit institutions increased from

97 in 1990 to 269 in 2000 (Source: Thomson Financial).

In Europe, such increase in M&A deals is also due to two essential factors. First, the Second

Banking Coordination Directive 1 has enhanced financial liberalization, introducing more lenient

restrictions to the spread of financial institutions to other member states of the EU. Second, the creation of

the European monetary union by the introduction of the single currency. The single currency improves

markets integration, which in turn means business reorganization becomes more attractive, as it offers the

possibility to take advantage of new opportunities. It also represents a way to protect domestic markets

from international competitors (Campa and Hernando, 2002).

However, profits from M&A deals are still confusing, despite such increase in the number of

transactions of this kind2. On the one hand, studies carried out to analyse abnormal return for the

shareholders of the institutions involved in an M&A have showed mixed results. Most previous works3

have showed a positive abnormal return for the target institution, but negative or not significant results for

the acquirer. On the other hand, studies analysing the influence of M&A deals on profitability or

efficiency of institutions have proved inconclusive as well. Some studies find the banks acquiring other

credit institutions increase their efficiency (Akhavein, Berger and Humphrey, 1997) or market-to-book

value ratio (Cyree, Wansley and Black, 2000). Others do not find considerable profits to be gained

through M&A deals, as they do not find a significant influence of acquisition on efficiency (Berger and

1 Such directive liberalized the financial services commerce within the EU by the introduction of the “single banking licence” and established the universal character of banks in the EU. 2 See Rhoades (1994) and Piloff and Santomero (1998) for a revision of existing literature regarding this point. 3 See Campa and Hernando (2004).

3

Humphrey, 1992; DeYoung, 1993 and Peristiani, 1997) nor profitability (Srinivasan and Wall, 1992;

Linder and Crane, 1992 and Pilloff, 1996) for the institutions involved.

Within this context, studies on the price paid for M&A transactions becomes specially

significant, since lack of profits in such transactions could be due to the high premium paid for the

acquisition, which could put the solvency and stability of the institution at a risk. In fact, 75% of hostile

takeovers carried out from 1985 has not succeeded because of the premium paid. This influenced the fact

that such transactions decreased from about 22% of total takeovers in 1987 to less than 10% in 1998

(Cuervo, 1999).

In particular, this study aims at analysing determinants of the premium paid for M&A deals

carried out by European credit institutions. A major understanding of the factors determining such price

could help us to find those characteristics of the target institution and its correspondent market that seem

more attractive for the acquirer. This in turn could help us to find the reasons for the wave of financial

mergers and acquisitions that took place during the 1990s (Rhoades, 1987). This analysis will also show

how continuation of transactions would affect the banking sector.

However, the premium does not only depend on how attractive the target institution is

considering its potential value, but also on the financial capacity of the acquiring institution. As a result,

the analysis will consider both the characteristics of the target and the acquiring institutions.

This study will allow us to eliminate some of the limitations found in previous works aiming at

analysing the determinants of the premium paid for banking acquisitions or at analysing the reasons for

M&A deals.

First, conclusions of previous works on premium determinants can be influenced by the

geographical area where the M&A was carried out and by the moment when it took place, as Cheng, Gup

and Wall (1989) remark. This fact means the results of works performed cannot be applied to any country

or institution.

On the one hand, the works performed focus on the analysis of the transactions carried out within

the American market, whereas no studies of this kind have been carried out for the European market.

Europe shows less regulatory restrictions for banks expansion, both geographically and of products, than

4

the United States4. Such lenient restrictions imply more potential buyers target financial institutions and

thus premiums paid for banking M&A in Europe could be higher.

On the other hand, previous works have resulted in mixed conclusions and depend largely on the

moment when they were performed, the sample analysed and the methodology involved. In fact, many of

these works have focused on quite limited samples, not performing an analysis on the wave of mergers

and acquisitions that took place during the 1990s, since data used for most studies date from the 1980s.

Second, this study will allow us to eliminate some of the limitations found in previous works to

analyse the reasons for M&A deals since it offers an alternative perspective for analysis.

M&A deals involving credit institutions can be due to different reasons that usually vary

according to the characteristics of each institution, country or even period of time. Generally, two

essential reasons can justify a M&A: maximization of the institution value and maximization of

managers’ wealth or the search for private profits.

Determination of such reasons constitutes an empirical fact which has been considered in the

literature from two perspectives.

On the one hand, abnormal return associated to M&A transactions has been studied in order to

quantify the effects the consolidation has on value creation expectations of the market. In this sense, when

a positive abnormal return takes place the reason for the transaction could be value maximization, and

when it does not the reason for the transaction could be the search for private profits5.

The disadvantage of these studies is the fact that their results can show investors’ opinion and

speculative behaviour towards the operation results expected. However, operation results do not clearly

determine the reasons for the transaction, since the results expected by investors can vary from managers’

objectives.

On the other hand, the effects of the transaction on profitability and efficiency of the institutions

involved have been studied in order to analyse the reasons for M&A. However, this kind of works also

show some limitations. On the one hand, the use of accounting information in order to determine the

4 In the United States, the Glass Stegall Act, which was in force until November 12th 1999, imposed restrictions on the acquisition of non-banking financial institutions by credit institutions, thus restricting product diversification. Until the Riegle-Neal Act was approved in 1994 and was put into force in 1997, restrictions on inter-state acquisitions existed to limit geographical diversification. 5 Results from these works generally show that shareholders of the target institution are positively affected and those of the acquiring institution are negatively affected, while results concerning the whole effect have not proved conclusive (Houston and Ryngaert, 1994; Madura and Wiant, 1994; Becher, 2000).

5

variables involved, and on the other hand, evaluation of profitability or efficiency immediately after the

transaction takes place does not show managers’ expectations, so the reason for the transaction could be

misinterpreted6.

In this sense, an analysis of the determinants of the premium paid for the transaction avoids some

of these disadvantages, since it helps to determine what variables of the target institution could be

attractive as well as the reasons for the acquisition. The advantage of this analysis on the events studies is

that the premium is not directly associated to investors’ opinion or speculative behaviour. On the other

hand, the analysis of premium determinants considers the reasons to carry out the M&A a priori, what

means when the transaction is paid. In this case, the reason for the transaction would not be affected

although neither managers’ expectations nor expected profitability or efficiency are achieved (Rhoades,

1987).

This work is structured as follows. Section 2 constitutes a revision of previous studies of the

premium paid for banking M&A and raises the different hypotheses to test. Section 3 describes the

sample, methodology and variables used. Section 4 shows the main results obtained from the empirical

analysis and section 5 shows the main conclusions.

2. DETERMINANTS OF PREMIUMS PAID FOR BANKING MERGERS AND ACQUISITIONS:

A LITERATURE REVIEW

Two different methodologies have been used in previous studies analysing premium

determinants. On the one hand, some works introduce a number of financial ratios and other variables

directly in the samples they analyse in order to subsequently select those becoming more significant in a

stepwise analysis (Fraser and Kolari, 1988; Frieder and Petty, 1991). However, this methodology is

highly arbitrary and models usually over-adjust. On the other hand, another group of works select the

variables included in the model according to a number of hypothesis based on previous empirical analysis

and the existing literature (Hannan and Rhoades, 1987; Worthington, 2004). Such methodology

represents a more consistent way to choose the factors to be analysed and thus avoids the disadvantages

of the previous method. This work will be performed according to the second method.

The premium paid is analysed according to different factors belonging to two main categories:

the characteristics of the target company that are attractive and justify the payment of a higher premium

6 It can take a long time to perceive the effects of M&A on profitability. According to Rhoades (1994) 50% of income from banking acquisitions comes after the first year following the operation. That is why a longer period of time is analysed in most studies, considering results from the first year to even the sixth year after the operation takes place.

6

and the characteristics of the acquiring company that determine its capacity to carry out the acquisition,

which are developed below and set the basis for the hypotheses to be considered.

2.1. Characteristics of the target company that justify payment of a premium.

Two factors associated with the expected operation results can make the target institution

attractive. On the one hand, payment of a premium for the acquisition suggests the acquired institution

value is higher for the acquirer than for its original owners. Such higher value can be explained by the

possibility that the acquirer enhances the profitability of the target institution, for instance, through scale

economies or by improving management of the company. On the contrary, the objective of the acquiring

institution can be different from value maximization. In this case, managers would try to increase the size

of the institution in order to obtain higher private benefits.

2.1.1. Value maximization

Value maximization should be the main reason for the consolidation operations (Berger,

Demsetz and Strahan, 1999; Group of Ten, 2001). Different factors can contribute to value maximization:

scale economies, scope economies, market power, management improvement and risk reduction through

the geographical and product diversification arising from M&A transaction.

a) Scale and scope economies

First, the reason for banking mergers can be the search for synergies through scale or scope

economies. Presence of scale economies would imply the reduction of costs or the rise of profits per unit

due to an increase in size or in the number of transactions. Scope economies allow reductions of costs per

unit due to synergies arising from the commercialization of different products by the same institution.

In this sense, the price paid for a M&A can depend on the capacity of the acquirer to reduce the

costs of the new organization. Such reduction is easier when acquiring small institutions (Thompson,

1997; Focarelli, Panetta and Salleo, 2002; Worthington, 2004). In particular, previous works frequently

use a variable considering the “relative size between the target and the acquiring institutions” to look at

this point. The more their size differs, the more the acquirer can improve efficiency and profitability of

the target institution through scale and scope economies and through new services and technologies.

Moreover, when the size of the target institution is similar to that of the acquirer it is more difficult and

expensive to merge their different cultures.

Empirical evidence in this sense has proved inconclusive. Relative size has been calculated by

considering both the size ratio of the acquirer to the target institution and its inverse. On the one hand,

7

Darnell (1973) found a positive relationship between this variable (which implies the existence of major

differences between the size of the two institutions involved) and the premium paid by using the first

variable. This variable is not significant in Jackson and Gart’s work (1999), since they find synergy is

possible only if both institutions are located in the same geographical area apart from having a similar

size. On the other hand, a negative relationship with the premium paid has been found by Benston,

Hunter and Wall (1995), Palia (1993) and Cheng, Gup and Wall (1989)7 according to the second variable.

This means the bigger the difference in size of the institutions involved is the higher the premium paid is.

Brewer, Jackson, Jagtiani and Nguyen’ work (2000) is performed in the same terms, although they

consider how the market values their difference in size. The negative relationship found between the

relative size and the abnormal return arising from announcement of a M&A deal has led them to conclude

that the market does not consider the benefits coming from the creation of a “too big to fail” institution,

but it concentrates on the problems arising from the union of the cultures of two big institutions.

b) Market power

Another reason for M&A deals is the search for an increase in market power. In this sense, the

most attractive institutions would be those located in the same geographical area as the acquirer since

they would help the acquirer to increase its power within a particular market. This fact can imply an

increase in benefits through a rise of interest rates for loans and a decrease in interest rates for deposits

(Berger, Demsetz and Strahan, 1999). As a result, if the transaction aims at increasing market power, the

higher market share of the target institutions is, the higher the premium will be, in case both institutions

are located in the same country. However, the restrictions authorities can impose on the acquisitions

leading to a significant increase in market power, which aim at protecting competitiveness, should be

taken into consideration.

c) Management improvement

Management of the target institution can also have an effect on its price. On the one hand,

premium would be higher if management of an institution is considered to be inefficient but it can be

improved through re-organization and/or by changing business behaviour of the company. However, on

the other hand, the acquirer can be more interested in those institutions which have been correctly

managed, so the premium paid for well-managed institutions can be higher. Generally, evidence found

shows the second case is more probable, as explained below.

7 Such relationship is found to be positive in Rogowski and Simonson’s work (1987).

8

On the one hand, the less efficient the target institution is before the acquisition, the easier it will

be to improve management and to enhance its efficiency and value, and thus the premium paid could be

higher8. As long as the industrial sector is concerned, Bethel, Porter and Opler (1998) point out that low

performance of target institutions can be detected and solved through acquisitions9. However,

management problems are not so easy to detect through acquisitions. In fact, only a third of the hostile

takeovers that took place, for instance, in the United Kingdom in 1989 and in early 1990 aimed at

institutions showing clear signs of bad management. Despite the fact that more than half the bank

managers are fired within the two years following the transaction, both Martin and McConnell’ work

(1991) for the United States and Franks and Mayer’s work (1996) for the United Kingdom show there are

no significant differences in the premium paid for those target institutions where the executive had

changed and those where it had not.

On the other hand, higher premiums should be paid for well-managed institutions, since they are

considered to be more valuable. Previous studies have considered such management efficiency through

profitability.

Evidence found shows a positive relationship between premiums and profitability, both Return

on Assets - ROA (Fraser and Kolari, 1988; Hakes, Brown and Rappaport, 1997; Palia, 1993; Jackson and

Gart, 1999) and Return on Equity - ROE (Beatty Santomero and Smirlock, 1987; Cheng, Gup and Wall,

1989; Frieder and Petty,1991; Shawky, Kilb and Staas, 1996 and Brewer, Jackson and Jagtiani, 2000).

d) Diversification

One of the reasons for a banking merger is the wish to reduce total risk through geographical and

product diversification. The acquiring institution aims at diversifying profits through higher cash flow for

the same risk level. As a result, the acquirer could pay more when the target institution allows a

diversification of profits (Benston, Hunter and Wall, 1995). In this sense, a negative relationship between

risk (measured by the standard deviation of the performance of the target institution) and the premium

paid has been found. This fact supports the hypothesis that suggests the transaction aims at diversifying

profits (Benston, Hunter and Wall, 1995; Brewer, Jackson and Jagtiani, 2000).

8 Some works use corporate governance variables to evaluate management quality of the target institution. They consider the effects that both the size and composition of the board of directors (Brewer, Jackson and Jagtiani, 2000) and the shareholding structure of the institution (Palia, 1993) have on management quality. These works also analyse the effects of such factors on the determination of the price paid for acquisitions. 9 Purchase of a block of shares corresponding to at least 5% of total shares of the institution.

9

Likewise, higher premiums could be expected to be paid for acquisition of non-banking financial

institutions (such as investment and insurance companies) by credit institutions when the transaction aims

at diversifying their activities. Conclusive results cannot be found from an empiric perspective to state

that acquirers can improve their results through the acquisition of non-banking financial institutions10

(Cyree, Wansley and Black, 2000), so diversification of profits could explain payment of higher

premiums for transactions of this kind (Kwan, 1998). However, European banks act according to the

principle of “Universal Banking” providing a wide range of products. Except for some exceptional cases,

most European credit institutions provide services related to insurance, investment and pension plans

apart from the traditional banking commercial services. That is why, in this context, payment of higher

premiums for non-banking financial institutions would be nonsense11. However, despite the fact that all of

them provide financial services, credit institutions can be divided into different specialized groups

according to the services they concentrate on (DeLong 2001). In this sense, acquirers could be interested

in institutions belonging to a specialized group providing different products and could be willing to pay

higher premiums for them.

The search for geographical diversification can also have an effect on the price paid for M&A

transactions, since the risk-profitability relationship of the institution can be improved because of the low

correlation existing between costs and income coming from different locations. In this sense,

geographical diversification would be positively related to the premium paid.

However, geographical diversification can reduce the efficiency of institutions involved in cross-

border transactions and, as a consequence, the premium that the acquiring company is willing to pay.

There are two reasons for that: first, difficulties for managing and controlling institutions from a distance

(Berger and DeYoung, Genay and Udell, 2000); second, the existence of a number of obstacles to the

establishment of foreign companies into domestic economies, such as language, culture or regulatory

barriers. In this sense, cross-border mergers and acquisitions are less frequent than domestic ones.

Domestic consolidation operations not only eliminate these disadvantages, but also offer the possibility to

10 In fact, most diversified institutions seem to quote at a discount compared to non-diversified institutions. Some of the reasons for this discount are, among others: an inefficient allowance of capital expenses to the different divisions of the company, difficulties to establish payment mechanisms motivating managers of diversified institutions, information asymmetries between the chief executive and division directors (Campa and Kedia, 2002). 11 In fact, acquisition of non-banking financial institutions is not found to produce profits for the acquiring institution in Díaz et al. (2004).

10

eliminate redundant costs arising from geographical overlapping (Berger and Humphrey, 1992; Pilloff,

1996).

As a consequence, evidence regarding the premium paid for transactions contributing to

geographical diversification has showed mixed results. Works performed in the United States market

have considered this point by differentiating the transactions that take place within the same state and

those performed at an inter-state level. On the one hand, geographical diversification through M&A deals

leading to markets expansion is considered to imply payment of a higher premium. In this sense,

premiums paid for inter-state transactions are considered to be higher (Rogowski and Simonson, 1987,

Frieder and Petty, 1991, Shawky, Kilb and Staas, 1996). On the other hand, M&A deals carried out

within the same state are considered to allow reduction of costs and obtaining of synergies arising from

scale economies. In this sense, Jackson and Gart (1999) found payment of higher premiums for within the

same state transactions.

e) The market where M&A takes place as the reason for the premium paid

The market where the target institution operates can be attractive for the acquirer, since it can

determine the profitability of the transaction and thus lead to value maximization. As a result, the price

paid for the acquisition would be affected by the market.

On the one hand, higher economic growth or development of banking in the country where the

target institution is located implies the capacity to generate new income by the acquirer. As a

consequence, higher premiums would be paid for those institutions located in countries where growth

rate12 is higher or banking is a more important sector13 (Rhoades, 1987; Frieder and Petty, 1991; Focarelli

and Pozzolo, 2001).

On the other hand, payment of a premium to enter more concentrated markets has been

considered by some authors, since those markets are more likely to be profitable due to lower

competitiveness. However, evidence found shows mixed results. Although Beatty, Santomero and

Smirlock (1987) found a positive and significant relationship between the premium paid and this variable,

other authors found no significant relationship (Hakes et al., 1997; Brewer, et al., 2000b).

The importance of the market where the target institution operates has led a number of authors to

introduce on their analysis of premium determinants dummy variables indicating the geographical area

12 This variable has been evaluated through expected growth of deposits or population growth. 13 This variable has been evaluated through the ratio credits in a country to Gross Domestic Product (GDP).

11

where it is located (Frieder and Petty, 1991; and Brewer, et al., 2000b). In this sense, any possible factor

affecting payment of a higher premium within a particular market could be controlled.

2.1.2. Objectives differing from value maximization

Different factors can also explain the reasons why the target institution seems attractive for the

acquirer and thus justify the merger and acquisition deal. These factors do not aim at maximizing

institution value, but directors’ wealth or private profits (Berger, Demsetz and Strahan, 1999; Group of

Ten, 2001).

Mergers can be done with the aim of increasing the institution size. Such objective, called “too

big to fail”14 in Anglo-Saxon literature, has been one of the reasons for major banking mergers in the

1990s (Kane, 2000) and can justify payment of higher premium for mergers between similar institutions

and for mega-mergers. The wish to aggressively grow means bigger and more profitable institutions are

more willing to pay higher premiums for M&A transactions (Hakes, Brown and Rappaport, 1997).

Likewise, higher growth of the target institution would contribute to meet such objective. In this

sense, asset growth has been generally used as the variable to evaluate this growth. Evidence found

concerning this variable shows mixed results. It was found to be significant by Hakes, Brown and

Rappaport (1997), Cheng, Gup and Wall (1989)15, Rhoades (1987), but non-significant by Palia (1993).

On the other hand, the only reason for an acquisition could be the wish not to be absorbed by

other institutions –defensive attitude–. In this sense, Louis’ study (2004) shows those institutions which

have been the target in a previous transaction pay higher premiums for acquisitions.

Likewise, if the M&A aims at controlling the target institution, the premium paid would be

affected by the shares percentage of the target institution that the acquirer owns before the M&A takes

place (Bris, 2002).

Finally, the possibility that managers adopt “herd” behaviour and carry out consolidation

operations simply to emulate and follow their competitors must be considered. Banking consolidation

process could also be explained as a response to deregulation (Berger, De Young, Genay and Udell,

2000), in the same way that Mitchell and Mulherim (1996) justify business acquisitions as a reaction to

industrial shocks, deregulation and financial innovations with the aim of reorganizing the company to

14 The reason for non-failure of such institutions may be they are more protected by banking authorities. 15 These authors have also considered other growth variables as explanatory variables for the premium paid, such as: growth of profitable assets, including loans, deposits in other banks, public debt, investments in assets and discounts; growth of main deposits, including all kinds of deposits except for inter-banking ones; and equity growth.

12

adapt to a new reality.

2.1.3. Other variables of the target institution that justify the premium paid for M&A

deals.

a) Equity / assets. Banking regulation establishes that credit institutions must maintain a

minimum percentage of equity so that risk can be reduced. However, a larger proportion of

equity on assets could imply the target institution is not efficiently using its capital and is risk

averse. This which makes the institution less attractive and thus the premium paid is lower.

Evidence in this sense has been found by Rhoades, (1987), Rogowski and Simonson (1987)

and Hakes, Brown and Rappaport (1997). However, Palia (1993) has not found significant

results for this variable16.

b) Loans / total assets. This ratio is used to estimate both non-liquidity of assets and the effects of

possible losses arising from loans on assets and capital, which would make the target

institution become less attractive and thus would reduce the premium paid, ceteris paribus17

(Beatty, Santomero and Smirlock, 1987).

c) Non-interest income / assets. An important change in banks’ income structure has taken place

in the 1990s. Increased banking competitiveness has reduced traditional income from interests.

This means that non-interest income has become the most dynamic source of income for

European banks. These sources of income are, for instance, benefits from loan securitisation,

credit card services and issues placing (Hakes, Brown and Rappaport, 1997). A positive

relationship between this variable and the premium paid has been found.

2.2. Capacity of the acquirer to pay and to improve management of the target institution: effects on

the premium

Two characteristics of the acquirer can affect the premium paid for a M&A: capacity to pay and

capacity to improve management of the target institution.

Financial strength of the bank allows payment of a higher price for M&A transactions. The

following variables of the acquirer have proved positively significant for premium determination: non-

16 Another variable has been considered for the determination of the premium paid: excess of equity, measured by the difference between the ratio equity to assets and the proportion of equity that institutions must maintain according to banking regulation (Frieder and Petty, 1991). 17 The percentage of loan cancellations on total loans has also been considered from an empirical perspective for determination of the premium paid. However, results from these works prove inconclusive. A negative relation has been found by Frieder and Petty (1991), a positive relation by Cheng, Gup and Wall (1989) and no significant relation by Brewer et al. (2000b).

13

interest income, return on assets (Hakes, Brown and Rappaport, 1997) and proportion of equity on assets

(Benson, Hunter and Wall, 1995). However, other authors such as Jackson and Gart (1999) and Frieder

and Petty (1991) find a non-significant relationship between the premium paid and the following financial

variables of the acquirer: size, return on assets, proportion of main deposits on assets, leverage ratio and

return on equity. Such lack of significance has led some authors to exclude the characteristics of the

acquirer from their analysis (Palia, 1993).

However, despite the capacity of the acquirer to pay has sometimes proved not be significant for

determination of premiums, the means of payment (stock or cash) has proved especially relevant

according to two reasons: financial synergies and overvaluation hypothesis. According to the first one,

Hakes et al. (1997) consider transactions paid in stock can offer higher financial synergies than

transactions paid in cash, since the latter could imply liquidity restrictions. In this sense, the premium paid

is higher when the transaction is paid in stock (Hakes et al., 1997; Shawky, Kilb and Staas, 1996; Beatty,

Santomero and Smirlock, 1987). The same relationship between the premium and the form of payment

can be explained according to Myers and Majluf’s (1984) overvaluation hypothesis. Their hypothesis is

based on the existence of asymmetric information about the company, considering directors have more

information than the rest of agents. If directors of the acquiring institution consider their shares to be

overvaluated, they will be more willing to pay the acquisition in stock. However, payment in stock would

be interpreted as a negative sign by the market, which is aware of information asymmetries, and thus the

value of shares of the acquirer would decrease. So the premium should be higher for those acquisitions

paid in stock than for those paid in cash.

On the other hand, if the acquirer is well-managed it will be more likely to improve management

of the target institution and higher value of the institutions involved will be possible. Since management

quality cannot be directly observed, some variables such as profitability and growth of the institution have

been considered to estimate it. In this sense, the following variables of the acquirer have proved

significant for determination of the premium paid: asset growth (in a negative sense, Cheng, Gup and

Wall, 1989), growth of main deposits (in a positive sense, Cheng, Gup and Wall, 1989) and return on

assets (in a positive sense, Hakes, Brown and Rappaport, 1997).

In short, a revision of the existing literature would allow us to establish the following hypotheses

for the analysis of premium determinants, and this in turn would allow us to reach some conclusion

regarding the reasons for M&A deals.

14

H1: “The more attractive the target institution is for an acquirer aiming at maximising institution

value, the higher the premium paid will be.”

H2: “The more attractive the target institution is for an acquirer aiming at obtaining private

benefits, the higher the premium paid will be.”

H3: “The better financial strength and management of the acquirer, the higher the premium

paid.”

3. EMPIRICAL ANALYSIS: SAMPLE DEFINITION, VARIABLES AND METHODOLOGY

3.1. Definition of the sample

The empirical analysis is carried out for a sample of mergers and acquisitions accomplished by

European Union banks during the period 1994-2000. The measurement of some of the variables used in

the study will need two years lagged data, therefore the information about banks will range the period

1992 – 2000.

We started with a sample of 4187 European banks that supply data to the Bankscope database

and a sample of 1465 acquisitions by European banks provided by Thomson Financial. Then, we refined

the sample in the following way. We eliminated from the sample those operations for which we did not

have information about the premium paid (this information was only available in 193 operations).

According to the available information in Bankscope database about banks, we also have to eliminate

from the sample outside the European Union M&A and operations in which the target was a nonbank

financial institution (such as insurance companies, investment agencies and mortgage bankers). Finally,

the analysis was conducted on a sample of 81 M&A. The number of different banks that took part in these

operations is 14718.

Table 1 shows the number of M&A in the sample per year and table 2 shows the number of

M&A per bidders´ and targets´ country. The number of operations is concentrated in the last years of the

analysed period and in the following countries: Italy, Spain and France. Moreover, table 3 shows some

characteristics of the analysed M&A. Most of the operations are paid in cash (80%) and are domestic

(81%). The number of operations accomplished by banks compared to the ones done by savings banks or

cooperatives is quite similar (57% by banks and 43% by savings banks and cooperatives). However, in

81% of the M&A the target is a bank.

18 In the sample, the same bank can take part in different acquisitions during the analysed period of time. Therefore, the same bank can be bidder or target in different operations, or be the bidder in a M&A and the target of another M&A.

15

[Insert Table 1, 2 and 3]

Apart from the aforementioned databases, we also used World Development Indicators 2001 for

macroeconomic information.

3.2. Methodology

The methodology used to test hypotheses 1, 2 and 3 is based on a linear regression analysis

(Rhoades, 1987; Cheng, Gup and Wall, 1989; Hakes, Brown and Rappaport, 1997). This analysis allows

us to show the determinants of the premium paid and will help to establish some conclusions about the

reasons to carry out a M&A as well as the characteristics of the acquiring bank that explain the payment

of a higher or lower premium19.

In particular, the equation to test is the following:

Premium it = µ 0 + β0 T_EQUITY + β1 T_LOAN + β2 T_NII + β3 A_EQUITY + β4 A_NII +

+ β5 A_GASSET + β6 CASH + β7 T_GASSET + β8 PREV_OWN + β9 PREV_ACQ + β10 T_ROE +

+ β11 A_ROE + β12 NATIONAL + β13 POWER + β14 DIVERSIFICATION + β15 A_SIZE + β16 T_SIZE

+ β17 RSIZE + γ j Country Dummysj + µ t Time Dummyst + uit

3.2. Variables description

a) Dependent variable: the premium

Dependent variable is purchase price to book value of the target, as it is in most of the studies20.

This variable has limitations since bank’s book value is not a perfect substitute for the market value of its

net assets. However, market values simply are not available. Nevertheless, because the vast majority of a

bank’s assets and liabilities either are short term or are repriced frequently, the approximation is

acceptable (Frieder y Petty, 1991).

The mean premium observed in the sample of European M&A is 2.1814 with a maximum value

of 9.76 and a minimum value of 0.30, being the standard deviation 1.44. In other studies carried out for

the United States market the mean premium has been lower. Palia (1993) shows a mean premium of 1.89

(with a minimum value of 0.7 and maximum of 4.9) and Jackson and Gart (1999) show a mean premium

of 1.987.

19 Cook and Weisberg (1983) test to detect heteroscedasticity, that test the null hypothesis of constant variance and is distributed as a chi-squared, show the presence of this problem in the regressions accomplished. Therefore, we used White correction to estimate the standard error, obtaining a consistent value for it (Benston, Hunter and Wall, 1995). 20 Hakes et al. (1995), Jackson and Gart (1999) and Palia (1993).

∑=

=

7

1

j

j∑=

=

2000

1995

t

t

16

In the next section the independent variables used to test the hypotheses are described. The

selection of these variables is derived from the literature revision carried out in section 2. The

independent variables that measure characteristics of the target or acquiring bank use financial

information of these institutions the year previous to the M&A.

b) Independent variables used to test hypothesis 1. These variables consider characteristics of the target

firm that justifies the payment of a premium when the M&A aim is to maximize value.

Variables related with the possibility of getting scale and scope economies.

• Size of the target bank (T_SIZE): measured by the natural logarithm of total assets of the target

bank.

• Relative size (RSIZE): target bank’s total assets over acquirer’s total assets, expecting a negative

relationship with the premium paid.

Variables related with the search of an increase in acquirer’s market power.

• The variable POWER will take into account the target bank’s market share and its presence in

the same market as the acquirer. This variable multiplies the variable SHARE and the variable

NATIONAL.

Market SHARE: , measured by the proportion of the total deposits of

a country that corresponds to a bank, i being each of the banks in a country.

NATIONAL: dummy variable that takes value 1 if the M&A is domestic and 0 if it is cross-

border.

Variables that consider the management quality of the target bank.

• Target bank profitability (T_ROE):

221

1

−−

−

+ tt

t

EquityEquityprofitNet

Variables related with diversification search

• Product diversification (DIVERSIFICATION)

The variable used to measure product diversification requires of a detailed explanation, since for

its calculation it was necessary to carry out a cluster analysis that allows identifying groups of banks

according to their product specialization.

The cluster analysis makes groups of banks minimizing the differences among companies inside

each specialization group, at the same time that the differences are maximized among the different groups

(Pérez et al., 2003).

∑=

n

iit

it

Deposits

Deposits

1

17

The cluster analysis is carried out over a sample of European credit institutions21 provided by

Bankscope database during the period 1993 - 1999 and with total assets over 60 million of euros, to

assure a minimum size of the companies included in the analysis. With this selection approach, the

number of observations is 20,347 and the number of banks is 3,861.

To determine the specialization groups we use variables that consider the assets and liabilities of

the European credit institutions. These variables that are shown in table 4 allow identifying two

specialization groups in the European banking system.

[Insert table 4]

The first group is specialised in the traditional banking activity (loans and deposits), while group

two includes more diversified banks and with a high importance of the inter-bank activities.

67 acquisitions, out of the 81 acquisitions analyzed in this work, were carried out between banks

belonging to the same cluster or specialization group, while 14 took place among banks belonging to

different groups, or with the aim of product diversification. Finally, the variable DIVERSIFICATION is a

dummy variable that takes value 1 when the acquirer and the target bank belong to the same group and 0

otherwise.

• Geographic diversification (NATIONAL). The variable NATIONAL, previously described,

differentiates between domestic acquisitions and cross-border ones.

Variables that consider characteristics of the target bank market.

The characteristics of the country the target bank belongs to will be considered through two

types of analysis. Firstly, we will introduce dummy variables to identify the target firm country, trying to

control for any possible reason that can provoke the payment of a higher premium in a concrete market.

However, some authors consider more appropriate to use specific variables to measure the possibility to

obtain earnings derived from the acquisition in a certain market, as we pointed out in the theoretical

revision. Therefore, secondly, two variables are introduced:

• The size of the banking sector in a country (CRED_GDP): measured by the ratio of bank

domestic credit to Gross Domestic Product.

• Concentration of the deposits in each country22 (HERF): measured through the Herfindahl index.

21 We considered the ten European countries shown in table 2. 22 See Corvoisier and Gropp (2001).

18

∑∑=

=

=n

in

iit

itit

Deposits

DepositsHERF1

2

1

, i being each of the banks in a country. We have one concentration

index for each country and year of the sample.

c) Independent variables used to test hypothesis 2. These variables consider target bank characteristics

that justify the payment of a higher premium when the aim of the acquisition is not value maximization.

Variables related with the aim of achieving a great size.

• Relative size (RSIZE): target bank’s total assets over acquirer’s total assets, expecting a positive

relationship with the premium paid.

• Size of the acquirer (A_SIZE): measured by the natural logarithm of total assets of the acquirer.

• Target bank’s growth in assets (T_GASSET) = (Assetst-1 – Assetst-2 ) / Assetst-2

Variables that consider if the acquisition is accomplish to avoid being acquired (as a defensive measure).

• PREV_ACQ: dummy variable that takes value 1 if the acquirer has been previously the target of

an acquisition and 0 otherwise.

Variables that consider if the aim of the M&A is to achieve the control of the target bank.

• PREV_OWN: ownership percentage of the target bank owned by the acquirer bank before the

acquisition.

d) Independent variables used to test hypothesis 3. These variables consider if the acquirer is financially

strong and is able to bring a more efficient, value creating management team to bear on the target bank

and can afford to overpay.

Variables to measure if the acquirer is financially strong.

• Acquirer’s non-interest income (A_NII) = Non interest income t-1 / Assetst-1

• Acquirer’s ROE (A_ROE) =

221

1

−−

−

+ tt

t

EquityEquityprofitNet

• Acquirer’s Equity (A_EQUITY) = Equityt-1 / Assetst-1

• Means of payment (CASH): Dummy variable which will take value 1 if the payment is in cash

and 0 otherwise.

Variables that consider the ability to improve management.

• Acquirer’s growth in assets (A_GASSET) = (Assetst-1 – Assetst-2 ) / Assetst-2

19

e) Control variables (characteristics of the target bank).

• Equity (T_EQUITY) = Equityt-1 / Assetst-1

• Loans (T_LOAN) = Loans t-1 / Assets t-1

• Non-interest income (T_NII) = Non-interest income t-1 / Assetst-1

Lastly, time dummy variables indicate the year of the acquisition23. These variables consider the

influence of any macroeconomic event or other variables over the M&A activity and therefore over the

premium paid (Brewer, Jackson and Jagtiani, 2000). Moreover, nowadays the number of mergers and

acquisitions is becoming higher and there are fewer banks to be acquired. Therefore, as time passes the

premium paid should be higher24 (Darnell, 1973).

Table 5 shows the descriptive statistics of the variables (mean and standard deviation).

[Insert table 5]

4. RESULTS OBTAINED IN THE EMPIRICAL ANALYSIS

The following section shows the main results obtained from our empirical analysis.

4.1. General Analysis

Table 6 shows the results obtained from the empirical analysis for the whole sample of M&A.

The first three columns show the results attained from regression analysis when considering dummy

variables for the country to which the target institution belongs. The next three include specific variables

for the country that may make the acquisition more attractive and therefore increase the premium paid.

The results described below, prove to be almost identical in both cases.

Firstly, all the regressions in table 6 show a series of variables for the target institution that are

significant for explaining the premium. These variables are: T_EQUITY, T_LOAN and T_ROE.

The first two variables were included in the analysis as control variables, given the prior

empirical evidence pointing to their influence on the premium. The results corroborate those obtained in

these previous studies. On the one hand, a higher percentage of equity over assets makes the target

institution less attractive, as it is considered to use its resources inefficiently and it is risk adverse,

therefore the premium paid is lower (Hakes et al. 1997). Furthermore, the T_LOAN variable, indicative

of the target institution’s percentage of loans over total assets, also reduces the premium paid, indicating

that those institutions with greater non-liquidity assets also prove less attractive (Beatty et al. 1987). 23 When all the time dummy variables take value 0, it means that the acquisition has been accomplished in 1994. 24 Table 1 shows that the mean value of the premium is higher in the last years of the sample than in the first ones.

20

The profitability shown by the target institution for the year prior to the takeover is both

significant and positive in explaining the premium. The profitability variable shown in the results is return

on equity25. This result is in line with the findings from previous works inasmuch as M&A operations do

not show higher premiums in the takeovers of companies which have been less well managed and have

had lower profit levels, therefore it cannot be stated that the aim underpinning the operation is better

management of the target institutions. Rather, the results show that higher premiums are paid in the

takeovers of those institutions that are more attractive because their yields are higher (Brewer et al.

2000b)26.

The premium paid in takeover operations does not depend on the NATIONAL dummy variable,

which differentiates domestic operations from those carried out between different EU countries. This

result highlights the debate that exists over the advantages and disadvantages of carrying out international

operations. If, on the one hand, the search for greater geographical diversification led to the payment of

higher premiums for cross-border operations, the problems arising from cultural, linguistic and regulatory

barriers would lead to a preference for domestic operations.

In particular, mergers and acquisitions carried out by credit institutions in Europe, still tend to be

at a domestic level. In fact, 66 of the operations analysed in this research work have been internal and

only 15 have crossed national borders.

Therefore, despite the fact that in the EU internal operations are exhausting their capacity to

generate economies of scale and cost reductions, and the search for new opportunities is advised through

the consolidation between institutions from the different member states, the directors of many institutions

still expect greater earnings from domestic operations, and thus do not decide to make cross-border

takeovers27. Furthermore, in many cases it is often the obstacles raised by national authorities, which by

25 However, we also carried out the analysis using return on assets (ROA). This variable does not alter the principal results obtained for the variables determining the premium paid, although the ROA was not significant either for the target institution or for the acquirer. 26 Furthermore, analysis was undertaken whereby the ROE variable was replaced by a cost efficiency (or operating efficiency) accountancy indicator, defined as the percentage of ordinary profit margin that absorbs running costs. This variable provides a measure of the capacity to generate income in relation to costs borne and indicates greater efficiency when the ratio decreases. The results obtained from the regression analysis where the ROE variable is replaced by that of operating efficiency, corroborates all the results obtained previously. Nevertheless, the variable that measures the efficiency of the target institution is not significant. i.e. the results underline that higher premiums are paid for those more profitable institutions but not for more efficient ones. 27 In fact, Beitel, Schiereck and Wahrenburg (2004) indicate that mergers between national banks produce an average increase in shareholder value of 1.5% when the merger is announced, whilst that produced between banks from different countries has a profitability of –0.4%.

21

trying to protect institutions in their own countries from foreign bids prevent profits being obtained in

international mergers and takeovers28.

Therefore, being faced with the exhaustion of advantages in their domestic operations and the

information barriers and government restrictions to which they are exposed in cross-border acquisitions,

acquirers do not behave any differently in the premiums they pay for either type of operation.

The POWER variable, resulting from jointly considering domestic operations and the target

institution’s market share, shows a significant and negative relationship in regressions 4, 5, and 6 in

which specific variables for the target institution’s country have been included. This result shows that the

acquirer is not willing to pay higher premiums to increase its market power by taking over institutions

with a greater deposit share. However, if we analyse the market share values of the target institutions in

detail, we find they are somewhat limited; falling below 1% in 47 takeovers and below 5% in a total of 65

operations. Therefore, it is not that the acquiring institution is not interested in increasing its market share,

but rather that with the market share of the target institutions this objective is not really achieved.

Furthermore, as was previously mentioned when the specialisation groups were analysed, 71 acquiring

institutions had already concentrated their banking activity in loans and deposits and would thus not be

willing to pay a higher price for institutions which implied the continued reinforcement of the said

activity29. Therefore, the fact that higher premiums are paid by those institutions within the same country

which enjoy a lower market share, must be due to other features of these institutions which are not

reflected through the said variable, such as reaching a specific geographic area within a country or

directing business toward a specific kind of client.

Product diversification, measured through the dichotomous variable, DIVERSIFICATION,

(which takes a value of 1 when the acquiring and target institutions belong to the same specialisation

group, and 0 otherwise) does not prove significant in explaining the premium. In fact, the income derived

from diversifying activities is not clear, which justifies more not being paid to diversify. In particular,

DeLong (2001) observes a positive abnormal yield of 3% only in those acquirers which concentrate on an

activity and on a geographic area, compared with those operations which give rise to financial

conglomerates and diversify their activity.

28 For example, in 1999 the Italian Government vetoed the operation between Banco Bilbao Vizcaya Argentaria and Unicrédito, and also in 1999 the Portuguese Government raised many obstacles to agreements between Banco Santander Central Hispano and the Champalimaud Group. 29 Likewise, there may be restrictions to increasing market power in defence of competition.

22

On the other hand, neither the size of the target institution (T_SIZE), nor its relative size

(RSIZE) are observed to be significant in explaining the premium. Therefore, higher premiums are not

found to be paid for smaller companies nor for those that are smaller in comparison to the size of the

acquiring institution and with which it would prove simpler to obtain economies of scale and scope.30.

This result also confirms that acquirers do not pay higher premiums for larger target institutions, in order

to attain greater size (Kane, 2000). The same conclusion is corroborated by the absence of significance

between the acquiring institution size (A_SIZE) and that of the growth of the target institution’s assets

(T_GASSET).

Therefore, with respect to H1, it can be concluded that different variables exist which make a

target institution attractive to an acquirer, such as its percentage of equity, its percentage of loans and its

ROE; larger premiums are thus paid for those institutions which are more valuable to the acquirer and for

those which are considered can attain a greater value maximisation. Nevertheless, it is observed how the

greater geographic or product diversification that can be attained through M&A has not been considered

by the acquiring institutions as a reason justifying the payment of higher premiums. The lack of

significance for some of the variables which should, in principle, have affected the premium paid, has

given rise to many mergers and acquisitions being justified through the need of the institutions to adjust

to their financial environments, in which increased deregulation and competition has led them to

undertake such operations (Berger, et al. 2000).

In addition, mergers and acquisitions may be used as a defensive measure, whereby those

institutions that have in the past been a takeover target, would be willing to pay higher premiums in the

takeovers they carried out, to thus reach a size that hinders their takeover by third party institutions. The

PREV_ACQ dummy variable takes value 1 if the acquiring institution has previously been taken over.

This variable proves insignificant in all of the regressions. It cannot therefore be stated that M&As have

been used as a defence mechanism by those institutions that have been takeover targets, as the findings do

not indicate payment of higher premiums. In fact, it has sometimes been observed that in institutions that

have recently been a takeover target, their management gains experience in this type of operations and in

their negotiation capacity, which may result in lower premiums being negotiated, and eventually paid..

30 However, as Jackson and Gart (1999) outline, there may be synergies which are only possible when besides dealing with institutions of different sizes, both lie in the same geographical area. For this reason, an interaction variable is introduced into regressions 3 and 6 between the relative size and the dummy variable, NATIONAL, which indicates if both institutions belong to the same country. However, this variable is also found not to be significant, although the significance of all the other variables observed in regressions 1, 2, 4, and 5 is maintained.

23

Likewise, Hart and Apilado (2002) show how banks that do not have experience in the corporate control

market carried out worse takeovers.

The percentage of ownership that the acquiring institution had in the target institution prior to the

takeover (PREV_OWN) may affect the premium paid, given the acquiring institution’s interest in

attaining control. Therefore, if its level of ownership is low, a higher premium will be paid, in order to

guarantee the success of the bid and that the intended level of control is achieved. However, the greater

the percentage of ownership, the fewer shares the acquiring institution will need to purchase to attain

control and the target institution’s negotiation power is reduced; therefore the premium paid to achieve

the increased shareholding will be lower. The negative relationship observed between PREV_OWN and

the premium corroborates this approach31.

In general, the results observed for H2 do not enable us to conclude that M&A operations are

carried out with the aim of seeking private gains for the managers, given that M&As are not used as a

defensive mechanism, nor are higher premiums paid to attain a greater size.

Finally, there are also variables pertaining to the acquirer itself that may explain the premium

paid, despite the fact that in most of the works, these variables have not proved to be significant, as in this

study. Furthermore the percentage of the acquiring institution’s equity, an indication of its financial

strength, was not significant in the analyses undertaken. Likewise the asset growth in the acquiring

institution, the percentage of non-interest income (A_NII) and the A_ROE variable also proved not to be

significant.

Therefore, it may be said that neither the acquiring institution’s capacity to pay, nor the quality

shown in its management, lead to the payment of higher premiums as was set out in H3. However, the

means of payment used for the operation is found to be a determining variable in the premium, showing a

negative relationship between payment in cash and the premium. This supports not only the financial

synergies hypothesis (which sets out the payment of larger premiums when the operation is paid in stocks

instead of in cash, given the liquidity constraints that this latter form of payment may produce), but also

overvaluation hypothesis (given that payment in shares may be considered a negative signal, which will

lower the share value and the premium paid will be correspondingly higher.)

31 Furthermore, the non-linear relationship between the level of ownership and the premium was considered, incorporating into the analysis the squared value of PREV_OWN, with the aim to test if there is a positive relationship with the premium in cases of low levels of ownership, until control is attained and then the relationship with the premium becomes negative. However, the non-linear relationship does not prove significant and has therefore been omitted from the tables of results.

24

Lastly, the results obtained in the country dummy variables that had been included in regressions

1, 2 and 3 show the payment of lower premiums in France and higher premiums in Spain. As regards the

two variables used to measure the possibility of obtaining earnings in a specific market (regressions 4, 5

and 6), HERF and CRED_GDP; only the second one proves significant. In particular, the greater the

percentage of domestic loans over GDP (indicative of a larger and more developed banking sector in the

country), the lower is the premium that is paid. In Europe, the activity of granting loans is fairly

concentrated among the larger institutions, lowering the possibilities of getting earnings in this activity.

Thus, although a country has a high CRED_GDP value the premium paid will be low32.

[Insert Table 6]

4.2. Analysis by Institution Groups.

Table 7 shows the results obtained in the analysis of the operations carried out by banks and

those carried out by savings banks and cooperatives. In the sample, 47 operations were carried out by

banks and 34 by savings banks and cooperatives.

There are certain elements which differentiate savings banks from banks and which may lead to

differences in the aims pursued in a M&A. For example, savings banks do not seek, at least formally, to

maximise profits but to achieve a reasonable surplus and provide support to their member (part of the

profits obtained are dedicated to charity). Also, savings banks activity is focused on the traditional

banking activity and retail banking. These differences have led us to undertake the analysis of the

premium for the two groups of institutions. Cooperatives have been included in the analysis with savings

banks, bearing in mind the similarity in their business orientation, building societies.

The results show some differences in the determinants of the premiums paid between both

groups of institutions, although some of the aforementioned results are maintained,

On the one hand, table 7 shows how the means of payment in the operation is only significant in

premiums paid by banks, whereas it totally lacks significance for savings banks and cooperatives.

On the other hand, the aim pursued by savings banks and cooperatives in takeovers may be the

search for greater size, given that the payment of higher premiums is observed in operations between

institutions of a similar size, despite it is more difficult to obtain economies of scale, as was discussed in

the theory review. This same size objective is corroborated when we observe the payment of higher

premiums for larger-sized institutions (T_SIZE) and those showing more growth in assets (T_GASSET)

32 In fact, in Díaz et al. (2004), it is shown that the profitability attained by credit institutions is lower, the greater the percentage of loans over GDP.

25

by those smaller-sized institutions (A_SIZE) and those showing less growth in assets (A_GASSET).

None of these variables is significant when analysing banks.

However, unlike what happens in banks, savings banks and cooperatives are found to pay higher

premiums for institutions with a higher percentage of equity (T_EQUITY), which highlights the interest

these institutions have for getting funding to pay other acquisitions and, to a certain degree, savings banks

and cooperatives’ greater risk aversion. However, the negative sign in the T_ROE variable observed for

savings banks effectively shows that more is paid for those institutions that are worse managed or have

been less profitable, since it is hoped that profitability will improve through the takeover.

Lastly, a significant negative influence is observed in the DIVERSIFICATION variable in

savings banks’ premium, which indicates the payment of higher premiums for those institutions

belonging to a different product specialisation group, i.e. they overpay to diversify. Savings banks and

cooperatives, whose activity is centred on deposits and loans, have therefore found in M&As a way to

diversify their activities. Also, higher premiums are paid for those institutions with higher non-interest

income or non-traditional banking activities.

Summarising, in the case of savings banks and cooperatives, the M&As undertaken pursue

specific objectives such as attaining greater size and growth, getting funding, improving the management

of the target institutions and the diversification of their activities.

[Insert Table 7]

5. CONCLUSIONS

The results obtained enable us to make a series of conclusions concerning the variables that

influence the price paid in M&A’s.

There are different variables that make a target institution attractive to an acquirer, such as its

equity percentage, its percentage of loans or its ROE. Nevertheless, it is observed how a greater

geographic or product diversification that can be attained through M & A has not been considered by the

acquiring institutions as a reason justifying the payment of higher premiums. It is only when we assess

the sub-sample comprising savings banks and cooperatives that evidence is obtained of a certain interest

in diversification of activities, and therefore the payment of higher premiums in takeovers which increase

diversification.

Therefore, to make the financial consolidation process develop successfully in the European

Union in the coming years, it would be convenient for the member states to reconcile their current

26

legislation on this matter. Currently Directive 89/646/EEC33 awards the authorities of each country the

power to limit, and even prevent, any operation they consider pertinent, under the criteria that adequate

management of credit institutions is required and also in function of the distortions in market competition

that they may produce. In fact, this legislation awards the government of each country the effective right

to veto, which has been used on numerous occasions, in order to protect national institutions and to avoid

their control by foreign institutions. This has hindered M&A’s of an international scale and has led to

acquirers undertaking cross-border operations less often than domestic ones. However, faced with the

thrust that international mergers and takeovers may experience in the coming years, fostered by the

definitive adoption of the new accounting standards (IAS), the recently approved new agreement on

capital (Basel II), and the entry of 10 new countries into the European Union, it is essential that

transparent, standardised procedures be set out34 that guarantee the success of such operations and allow

acquirers to recognise the advantages of cross-border operations, in view of the exhaustion of earnings

which is expected from domestic operations.

Furthermore, there was no evidence to suggest that M&As are being pursued with the aim of

achieving private profits for managers when analysing the whole sample of acquisitions (81). However,

when the savings banks sub-sample was assessed, it was observed that their aim in M&As has been to

attain a large size, and higher premiums were noted for mergers between equals, for larger institutions

and by those which have grown less, giving rise to large-sized institutions which are more difficult to

target for takeovers. This makes evident that the managers involved sought certain private benefits.

Therefore, in line with the Winter Report at European Union level or the Olivencia Report in

Spain, the regulators efforts to set out standards which increase transparency, reinforce managers’ and

directors’ responsibility, and in essence improve stakeholder protection should be intensified. Therefore,

agency problems will be reduced in M&A, in particular avoiding the search for private benefits by

managers and ensuring that although the objective of greater size and growth continue to be pursued in

the acquisition, the institutions guarantee value maximization.

33 This may also be found in Directive 2000/12/CE, which has gathered the legislation referring to the activity and control of EU credit institutions into a single text. 34 Europe needs a common legal framework for takeovers. The Directive 2004/25/CE tries to achieve this goal. However, the directive has been widely criticised because there is still too much freedom in this matter for member states who can adopt their national laws to avoid a takeover accomplished by a foreign institution. There is also a proposal for a Directive on cross-border mergers with the aim to make these transactions easier reducing its costs.

27

Furthermore, the lack of significance for some of the variables which should, in principle, have

affected the premium paid has given rise to many mergers and takeovers being justified through the

institutions’ need to adjust to their financial environments, in which increased deregulation and

competition has led them to undertake such operations.

The results obtained from this study establish the need to continue the research of the premiums

paid in M&As. In particular, once the determinants of the premium have been analysed and the apparent

reasons underlying the takeover have been established, it would be interesting to study the influence that

the premium has over the success or failure of the operation, attempting to show whether the price paid is

appropriate, or to the contrary, the takeover is overpaid. This analysis can be accomplished by

considering the relationship between the premium paid and the long-term profitability of the institutions

involved in the acquisition.

6. BIBLIOGRAPHY

Akhavein, J. D.; Berger, A. N.; Humphrey, D. B. (1997): "The effects of bank megamergers on efficiency

and prices: Evidence from the profit function", Review of Industrial Organization, Vol. 12, pp. 95-139.

Beatty, R.P.; Santomero A.M.; Smirlock, M. (1987): “Bank merger premiums – Analysis and Evidence”.

Monografía 1987a-3, New York: Salomon Brothers Center for the Study of Financial Institutions.

Becher, D.A. (2000): "The valuation effects of bank mergers", Journal of Corporate Finance, Vol. 6, pp.

189-214.

Benston, G.J.; Hunter, W.C.; Wall, L.D. (1995): “Motivations for Bank Mergers and Acquisitions:

Enhancing the Deposit Insurance Put Option versus Earnings Diversification”, Journal of Money, Credit

and Banking, Vol. 27, N. 3, pp. 777-787.

Berger, A. N.; Demsetz, R. S.; Strahan, P. E. (1999): "The consolidation of the financial services

industry: Causes, consequences, and implications for the future", Journal of Banking and Finance, Vol.

23, N. 2-4 pp. 135-194.

Berger, A. N.; DeYoung, R.; Genay, H.; Udell, G. (2000): “Globalization of financial institutions:

Evidence from cross-border banking performance”, W.P. No.2001-63, Board of Governors of the Federal

Reserve System.

Berger, A. N.; Humphrey, D. B (1992): "Megamergers in banking and the use of cost efficiency as an

antitrust defence", Antitrust Bulletin, Vol. 37 (Autumn), pp. 541-600.

28

Bethel, J.; Porter, J.; Opler, T. (1998): "Block share Purchase and Corporate Performance", Journal of

Finance, Vol. 53, pp. 605-634.

Brewer, E.; Jackson, W.E.; Jagtiani, J.A. (2000a): Impact of Independent directors and the regulatory

environment on bank merger prices: evidence form takeover activity in the 1990s”, Federal Reserve Bank

of Chicago, WP 2000-31.

Brewer, E.; Jackson, W.E.; Jagtiani, J.A.; Nguyen, T. (2000b): “The price of Bank Mergers in the 1990s”,

Economic Perspectives, Federal Reserve Bank of Chicago, First Quarter, pp. 2-23.

Bris, A. (2002): “Toeholds, takeover premium, and the probability of being acquired”, Journal of

Corporate Finance, Vol. 8, pp. 227-253.

Campa, J.M. and Kedia, S. (2002): “Explaining the diversification discount”, Journal of Finance, Vol. 57,

pp. 1731-1762.

Campa, J.M.; Hernando, I. (2002): “Value creation in European M&A”, Documentos de Trabajo del

Banco de España, N. 0223.

Campa, J.M.; Hernando, I. (2004): “Shareholder Value Creation in European M&As”, European

Financial Management, Vol. 10, N. 1, pp. 47-81.

Chen, D.C.; Gup, B.E.; Wall, L. D. (1989): “Financial Determinants of Bank Takeovers”, Journal of

Money, Credit and Banking, November, pp. 524-536.

Cook, R.D.; Weisberg, S. (1983): “Diagnostics for heterocedasticity in regression”, Biometrika, Vol. 70,

pp. 1-10.

Cuervo, A. (1999): “Razones para las fusiones y adquisiciones: factores organizativos no explícitos como

determinantes del éxito”, Economistas, Vol. 82, pp. 20-31.

Cyree, K. B.; Wansley, J. W.; Black, H. A. (2000): "Bank growth choices and changes in market

performance", The Financial Review, vol. 41, pp. 49-66.

Darnell, J.C. (1973): “Bank mergers: prices paid to marriage partners”. Federal Reserve Bank of

Philadelphia Business Review, July, pp. 16-25.

De Long, G.L. (2001): “Stockholder gains from focusing versus diversifying bank mergers”, Journal of

Financial Economics, Vol. 59, pp. 221-252.

DeYoung, R. (1993): "Determinants of Cost Efficiencies in bank mergers", Economic and Policy

Analysis Working Paper, 93-1. Washington Office of the Comptroller of the Currency.

29

Díaz, B.; García, M.; Sanfilippo, S. (2004): “Bank Acquisiitions and performance: evidence from a panel

of European credit entities”, Journal of Economics and Business, Vol. 56, N. 5, pp. 377-404.

Focarelli, D.; Panetta, F., Salleo, C. (2002): “Why do banks merge?”, Journal of Money, Credit, and

Banking, Vol. 34, N. 4, pp. 1047-1066.

Focarelli, D.; y Pozzolo, A. F. (2001): “The patterns of cross-border bank mergers and shareholdings in

OECD countries”, Journal of Banking and Finance, Vol. 25, pp. 2305-2337.

Franks, J.; Mayer, C. (1996): “Hostile takeovers and the correction of managerial failure”, Journal of

Financial Economics, Vol. 40, pp. 163-181.

Fraser, D.R. ; Kolari, J.W. (1988): “Pricing Small bank acquisitions”, Journal of Retail Banking, Vol. 10,

N. 4, pp. 23-28.

Frieder, L.A.; Petty, P.N. (1991): “Determinants of Bank Acquisition Premiums: Issues and Evidence”.

Contemporary Policy Issues, Vol. 9, N. 2, pp. 13-24.

Group of Ten (2001): "Report on consolidation in the financial sector", www.bis.org.

Hadlock, C.; Houston, J.; Ryngaert, M. (1999): “The role of managerial incentives in bank acquisitions”,

Journal of Banking & Finance, Vol. 23, N. 2-4, pp. 221-249.

Hakes, D.R.; Brown, K.H.; Rappaport, A. (1997): “The impact of state deposit caps on bank merger

premiums”, Southern Economic Journal, Vol. 63, N. 3, pp. 652-662.

Hannan, T.H.; Rhoades, S.A. (1987): “Acquisition targets and motives: The case of the banking

industry”, The Review of Economics and Statistics, Vol. 69, N.1, pp. 67-74.

Hart, J.R.; Apilado, V.P. (2002): “Inexperienced banks and interstate mergers”, Journal of Economics

and Business, Vol. 54, N. 3; pp. 313-330.

Houston, J. F.; y Ryngaert, M. D. (1994): "The overall gains from large bank mergers", Journal of Banking

and Finance, Vol. 18, pp. 1155-1176.

Jackson, R.; Gart, A. (1999): Determinants and Non-Determinants of Bank Merger Premiums”. The Mid-

Atlantic journal of Business, Vol. 35, N. 4, pp. 149-157.

Kane, E.J. (2000): “Incentives for banking megabank mergers: What motives might regulators infer from

event-study evidence”, Journal of Money, credit and Banking, Vol. 32, pp. 671-701.

Kwan, S. (1998): "The securities activities by commercial banking firms' 20 subsidiaries: Risk, return,

and diversification benefits", W.P. No. 98-10, Federal Reserve Bank of San Francisco.

30

Linder, J. C.; Crane, D. B. (1993): "Bank Mergers: Integration and profitability", Journal of Financial

Services Research, Vol. 7, pp. 274-282.

Louis, H. (2004): “The cost of using bank mergers as defensive mechanisms against takeover threats”,

Journal of Business, Vol. 77, pp. 295-310.

Madura, J.; Wiant, K. J. (1994): "Long-term valuation effects of bank acquisitions", Journal of Banking

and Finance, Vol. 18, pp 1135-1154.

Martin, K.; McConnell, J. (1991): "Corporate performance, corporate takeovers, and management

turnover". Journal of Finance, Vol. 46, N. 2, pp. 671-688.

Mitchell, M.; Mulherim, J. (1996): "The impact of industry shocks on takeover and restructuring

activity”. Journal of Financial Economics, Vol. 41, pp. 193-229.

Myers, S.; Majluf, N. (1984): "Corporate Financing and Investment Decisions When Firms Have

Information That Investors Do Not Have", Journal of Financial Economics, Vol. 13, pp. 187-221.

Palia, D. (1993): “The Managerial Regulatory an Financial Determinants of Bank Merger premiums”.

The Journal of Industrial Economics, March, pp. 91-102.

Pérez, F.J. and others (2003): “La experiencia internacional en el cambio de las cajas de ahorros”, in

Valero, F. (coordinator): Presente y Futuro de las cajas de ahorros, directed by Analistas Financieros

Internacionales, Fundación Caixa Galicia, Centro de Investigación Económica y Financiera.

Peristiani, S. (1997): "Do mergers improve the x-efficiency and scale efficiency of U.S. Banks? Evidence

from the 1980s", Journal of Money, Credit, and Banking, Vol. 29, N. 3.

Pilloff, S. J. (1996): "Performance changes and shareholder wealth creation associated with mergers of

publicly traded banking institution", Journal of Money, Credit, and Banking, Vol. 28, No. 3.

Pilloff, S. J.; Santomero, A. M. (1998): "The value effects of bank mergers and acquisitions", in Y.

Amihud y G. Miller (eds.): Bank Mergers and Acquisitions, pp. 59-78. Kluwer Academic.

Rhoades, S. A. (1987): “Determinants of Premiums Paid in Bank Acquisitions”, Atlantic Economic

Journal, March, pp. 20-30.

Rhoades, S. A. (1994): "A summary of mergers performance studies in banking, 1980-93, and an

assessment of the "operating performance" and "event study" methodologies", Stuff Studies, 1990-99

/ss169, Board of Governors of the Federal Reserve System.

Rogowski, R.J.; Simonson, D.G. (1987): “Bank merger pricing premiums and interstate banking”.

Financial Management Association, Las Vegas.

31

Shawky, H.A.; Kilb, T.; Staas, C.F. (1996): “Determinants of Bank Merger Premiums”. Journal of

Economics and Finance, Vol. 20, N. 1, pp. 117-131.

Srinivasan, A.; Wall, L. D. (1992): "Cost savings associated with bank mergers", Federal Reserve Bank

of Atlanta, W.P. No. 92-2.

Thompson, S. (1997): “Takeover activity among financial mutuals: An analysis of target characteristics”,

Journal of Banking & Finance, Vol. 21, N. 1, pp. 37-53.

Valero, F. and others (2003): “Presente y futuro de las cajas de ahorros en el sistema bancario español” in

Valero, F. (coordinator): Presente y Futuro de las cajas de ahorros, directed by Analistas Financieros

Internacionales, Fundación Caixa Galicia, Centro de Investigación Económica y Financiera.

Worthington A.C. (2004): “Determinants of merger and acquisition activity in Australian cooperative

deposit-taking institutions”, Journal of Business Research, Vol. 57, N. 1, pp. 47-57.

32

Table 1: Number of mergers and acquisitions in each year and mean value and standard deviation of the premium paid.

Year N. M&A Mean Premium

Standard deviation

1994 1 1.9552 .1995 11 1.9277 .571401996 9 1.9302 .899221997 11 1.7265 .678761998 14 2.4384 1.613391999 17 2.3126 2.290092000 18 2.4289 1.32103Total 81 2.1814 1.44777

Table 2: Number of M&A and mean premium by country.

Target bank Acquiring bank

N. M&A %

Mean Premium (Standard deviation)

N. M&A %

Mean Premium (Standard deviation)

AUSTRIA 3 3.7 1.56 (0.92) 1 1.2 2.32 (.) BELGIUM 2 2.5 1.64 (0.12) 1 1.2 0.87 (.) DENMARK - - - 1 1.2 2.68 (.) FRANCE 13 16.0 2.14 (2.36) 12 14.8 2.35 (2.43) GERMANY 6 7.4 1.63 (0.54) 8 9.9 1.58 (0.60) ITALY 31 38.3 2.17 (1.0) 31 38.3 2.34 (1.27) LUXEMBOURG - - - 4 4.9 1.43 (0.17) PORTUGAL 8 9.9 2.54 (1.65) 8 9.9 2.14 (0.60) SPAIN 17 21.0 2.39 (1.61) 15 18.5 2.29 (1.70) SWEDEN 1 1.2 2.68 (.) - - - Total 81 100.0 81 100.0

Table3: Characteristics of the M&A in the sample Means of Payment Type of operation Type of operation

Stocks Cash Domestic Cross-Border

(inside the EU)

Merger Acquisition

N. operations 16 65 66 15 14 67 Mean Premium 2.85 2.01 2.13 2.37 1.69 2.28

Type of institution

Acquirer Target Banks Savings Banks and

Cooperatives Banks Savings Banks and Cooperatives

N. operations 47 34 66 15 Mean Premium 2.13 2.24 2.09 2.55

33

Table 4. Specialization groups in the European banking system. Mean values for all the

institutions over which the cluster analysis is done

Mean values for the acquiring and target banks analyzed in this study that belong to each group

Assets (Percentage) Cluster 1 Cluster 2 Cluster 1 Cluster 2 Loans 55.90 24.10 49.55 27.65 Investments and Inter - bank 39.32 64.81 43.63 60.49 Fixed assets 1.63 1.57 1.63 1.27 Other assets 3.15 9.52 5.19 10.59 Liabilities & Equity (Percentage) Cluster 1 Cluster 2 Cluster 1 Cluster 2 Deposits (demand, savings and time deposits)

62.41 16.67 44.84 22.39

Inter-bank 19.65 36.45 24.96 40.69 Equity (Shares + Reserves + Net profit - Dividends)

5.89 23.65 7.05 8.12

Other funding (Long-term borrowing, Subordinated debt, Hybrid capital)

5.83 4.02 6.8 3.79

Other liabilities 6.22 19.21 16.35 24.01 Number of credit insititutions35 3743 330 131 16 Number of observations 19433 914 131 16 Number of acquirers 71 10 Number of target institutions 73 8 ROA 0.77 2.19 0.66 0.71 ROE 12.85 7.07 10.24 9.54

Table 5: Descriptive statistics of the variables.

Minimun Maximun Mean Standard deviation

Expected relationship with

the Premium PREMIUM .30 9.76 2.1814 1.44777A_SIZE 13.81 19.98 16.9398 1.42469 PositiveT_SIZE 11.01 19.33 15.1408 1.98705 NegativeRSIZE .05 216.95 19.9245 34.23798 Negative or Positive PREV_OWN .00 98.89 15.8470 28.80013 NegativeT_EQUITY .01 .37 .0766 .05209 NegativeT_LOAN .02 .95 .4893 .19799 NegativeT_NII -.01 .05 .0110 .00822 PositiveA_EQUITY .02 .23 .0669 .03512 PositiveA_NII .00 .03 .0103 .00682 PositiveA_GASSET -.10 .34 .1165 .09633 PositiveT_GASSET -.34 .42 .0496 .12933 PositiveT_ROE -.38 .36 .0481 .12551 Positive or NegativeA_ROE -.17 .32 .0953 .06666 PositivePOWER .00 .20 .0258 .05018 PositiveHERF .01 .17 .0464 .03811 PositiveCRED_GDP 65.13 147.46 104.58 15.096 Positive

35 It is possible that the same bank belongs to different groups in different years, because it might change its product specialization.

34

Table 6: Results of the regression analysis for the whole sample.

Model 1 2 3 4 5 6

(Constant) 6.153 (2.23)**

6.5079 (3.68) ***

6.4794 (3.51)***

8.8406 (2.68)***

9.439 (3.50)***

8.952 (3.16)***

Time-Dummy Variable

Yes Yes Yes Yes Yes Yes

Country Dummy Variables

Yes Yes Yes No No No

HERF - - - 4.2440 (1.08)

2.767 (0.72)

3.681 (1.07)

CRED_GDP - - - -.0266 (-2.52)**

-.0263 (-2.49)**

-.0243 (-2.16)**

T_EQUITY -7.603 (-1.75)*

-9.327 (-2.42)**

-9.291 (-2.52)**

-6.684 (-1.57)

-8.539 (-2.15)**

-8.788 (-2.26)**

T_LOAN -3.721 (-2.25)**

-3.805 ( -2.33)**

-3.809 (-2.48)**

-3.574 (-2.30)**

-3.707 (-2.42)**

-3.748 (-2.55)**

T_NII 0.138 (0.00)

-7.999 ( -0.29)

-6.287 ( -0.23)

.4914 (0.02)

-8.990 ( -0.37)

-7.864 ( -0.33)

A_EQUITY 8.083 (1.06)

9.102 (1.45)

8.9360 (1.45)

8.364 (1.09)

9.226 (1.48)

9.262 (1.49)

A_NII -33.691 (-0.98)

-28.93 ( -0.81)

-29.49 (-0.85)

-38.47 (-1.17)

-33.17 ( -0.97)

-31.76 ( -0.96)

A_GASSET -3.580 (-1.38)

-3.467 (-1.39)

-3.564 (-1.48)

-4.065 (-1.48)

-3.943 (-1.48)

-4.026 (-1.57)

CASH -1.203 ( -3.19)***

-1.213 (-3.21)***

-1.228 ( -3.28) ***

-1.187 (-3.16)***

-1.186 (-3.12) ***

-1.214 (-3.21) ***

T_GASSET .2359 (0.20)

.5228 (0.45)

.4854 (0.43)

.6906 (0.60)

1.126 (0.97)

0.9280 (0.80)

PREV_OWN -.0124 (-1.98)*

-.0133 (-2.27)**

-.0134 ( -2.43)**

-.0120 (-2.00)**

-.0128 (-2.25)**

-.0135 ( -2.56)**

PREV_ACQ -.5857 (-1.20)

-.6850 (-1.31)

-.7297 (-1.41)

-.1254 (-0.28)

-.1743 (-0.37)

-.3009 (-0.60)

T_ROE 3.228 (2.37)**

3.324 (2.52)**

3.350 (2.67)***

3.382 (2.49)**

3.525 (2.65)**

3.699 (2.92)***

A_ROE -1.3577 (-0.60)

-1.985 (-0.89)

-1.888 (-0.92)

-1.109 (-0.49)

-1.765 ( -0.80)

-1.473 ( -0.72)

NATIONAL .1041 (0.20)

.0107 (0.02)

- -.0306 ( -0.06)

-.1371 (-0.27)

-

POWER -9.691 (-1.63)

-7.669 (-1.43)

-7.507 (-1.49)

-11.18 ( -1.94)*

-8.972 (-1.77)*

-8.730 ( -1.85)*

DIVERSIFICATION -.3436 (-0.74)

-.3047 (-0.68)

-.3202 ( -0.72)

-.3736 (-0.82)

-.3320 (-0.76)

-.3171 ( -0.73)

A_SIZE -.1543 (-0.73)

- - -.1727 ( -0.80)

- -

T_SIZE .1921 (0.98)

- - .2232 (1.13)

- -

RSIZE .0083 (1.50)

.0041 (1.03)

- .0064 (1.11)

.0012 (0.32)

-

RSIZE*NATIONAL - - .0053 ( 1.31)

- - .0040 (0.95)

R2 0.5149 0.5063 0.5095 0.5011 0.4891 0.4924

Linear regression estimation using White correction. For each variable it is shown the value of the parameter and Student-t in brackets. * Significance at 10%, **significance at 5%, *** significance at 1%.

35

Table 7: Results of the regression analysis for a sample of acquisitions made by banks and a sample of acquisitions made by savings banks and cooperatives.

Banks (47 M&A)

Savings Banks and Cooperatives

(34 M&A) (Constant) 12.73054

(3.33) *** 18.64692

( 2.99) ** Time-Dummy

Variables Yes Yes

HERF .6595388 (0.13)

53.38513 (4.23) ***

CRED_GDP -.0339306 (-2.89)***

-.1373409 (-6.06) ***

T_EQUITY -12.79544 (-1.82) *

12.90663 (3.29)**

T_LOAN -2.274602 (-1.62)

-9.677264 (-7.72) ***

T_NII -16.77434 (-0.41)

80.10714 (3.07) **

A_EQUITY 7.287908 (0.58)

-23.06386 (-2.70) **

A_NII -36.68191 (-1.21)

-22.77779 (-0.56)

A_GASSET .6552916 (0.31)

-9.913403 (-5.54)***

CASH -1.431867 ( -2.38) **

.5711454 (1.11)

T_GASSET 1.100019 (0.55)

7.579137 (3.36)**

PREV_OWN -.0120939 ( -1.55)

-.1004479 (-5.62)***

PREV_ACQ -.1014847 (-0.16)

1.113071 (1.28)

T_ROE 1.615236 (0.81)

-9.459615 (-3.16) **

A_ROE -5.501885 (-2.04 )*

-19.9961 (-3.50)***

NATIONAL -1.184556 (-1.67)

1.03167 (1.20)

POWER -8.040935 (-1.51)

-114.0801 ( -3.75) ***

DIVERSIFICATION -.813515 (-1.04)

-1.267083 (-1.90)*

A_SIZE -.2247794 ( -1.02)

-1.62263 (-3.23) **

T_SIZE .0783579 (0.29)

2.106473 (3.87) ***

RSIZE .001832 (0.11)

.0228764 (2.03) *

R2 0.6081 0.9790

Linear regression estimation using White correction. For each variable it is shown the value of the parameter and Student-t in brackets. * Significance at 10%, **significance at 5%, *** significance at 1%.