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Post-acquisition profitability of banks: a comparison of domestic and cross-border acquisitions in the European Union

Published Online:July 3, 2014pp 310-331https://doi.org/10.1504/GBER.2014.063075

Abstract

This study evaluates shareholders’ wealth and profitability of 62 large EU bank mergers and acquisitions that were involved in domestic or cross-border transactions during the period 1997−2007. We use the standardised cumulative abnormal returns (SCAR) technique and a long window of 61 days to capture merger announcement wealth effects of both domestic and cross-border acquiring banks. We argue that standardising abnormal returns helps eliminate any biases in the estimation of wealth effects by giving equal weighting to all events surrounding the merger. Our results establish that, while the wealth effects of both types of mergers are negative, cross-border mergers create significant loss in shareholder value for the acquiring banks. Using standard determinants of profitability, we also conduct hierarchical regressions to ascertain the degree of merger impact on post-acquisition profitability. The results show that acquiring banks’ capital strength and cost efficiency are the most important factors influencing profitability in cross-border mergers. In contrast, profitability in the case of domestic mergers is driven more by the acquiring banks’ ability to take on greater risk.

Keywords

merger, acquisition, shareholder wealth, profitability, standardised abnormal returns, cross border, domestic, European Union, EU

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