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| Type | Bachelor's Thesis |
| Scope | Discipline-based scholarship |
| Title | An analysis on the factors influencing M&A premiums in the banking industry - Evidence from the European Union |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 49 |
| Date | 2018 |
| Abstract Text | This thesis investigates the effects of profitability, capitalization and regulations on acquisition premi-ums for a sample of European banking mergers and acquisitions between 1997 and 2007. Up until the financial crisis in 2008, the banking sector experienced a stellar growth fueled by deregulation, financial innovations and favorable market conditions. Deregulation in the European Union lowered the barriers of expansion for banks, allowing them to expand to new countries, gain in size and serve a larger pool of customers. It also increased competitive pressure, forcing banks to rationalize their capital either through releasing new products or through mergers and acquisitions. Consequently, mergers & acquisi-tions gained in popularity in the 1990s, which reinforced the consolidation trend of European banks, especially in the largest European countries. One way to investigate banks’ motivations is to analyze the different factors influencing the pay-ment of the premium. The factors influencing the premiums are not solely of financial nature, but can also be of regulatory nature, such as the effect of a low level of regulatory strength of a country. The main critique echoed after the crisis towards banks, were that they took excessive risks and did not hold enough capital, which ultimately forced their respective states to bail them out. These developments raised issues about bank supervision, bail-out funding and deposit insurance schemes that are of central importance to a functioning financial sector. These considerations motivate my focus on profitability, capitalization and regulatory factors for this thesis. The results of my empirical analysis echo the findings of the literature, with profitable and lower capi-talized banks fetching higher premiums. Paying a premium for an unprofitable bank could effectively penalize the bank’s stock and decrease shareholder value in the mid-term, due to the signal that such an action sends to the market. Moreover, gathering support to pay a premium for a profitable bank should - for bank managers - come easier than for an unprofitable one. Regarding capitalization, it appears that high capital ratios are often viewed as an inefficient use of capital in banking and are interpreted as a sign of high risk aversion, which would not encourage the payment of a premium. The obtained result on capitalization illustrate the role of capital levels in banking, which are comparatively lower than in other industries. Regarding the regulatory variables, my results do not show evidence that these variables have an impact on the premiums. In that sense, the evidence in favor of strict regulation having a negative effect on premiums is ambivalent. |
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