Financial determinants, target bank size, regional effects and the premium paid in bank merger situations

The banking industry has undergone various cycles of merger activity during the past fifty years. Some of the most dramatic developments in mergers have occurred during the past two decades. Changes in the regulatory environment have driven much of this merger activity. Significant deregulation within the banking industry has facilitated the most recent surge of consolidation beginning in the 1980s and culminating with the passing of the Gramm-Leach-Bliley, or Financial Services Modernization Act, in 1999.; The study addressed the key variables in determining bank merger premiums. It included various financial and other measures to model the premium paid in a bank merger situation.{09}A specific area of focus for the paper was the differences in bank premium's attributable to bank size. This area of interest compared banks with assets between {dollar}25 million and {dollar}100 million in assets to those with assets between {dollar}100 million and {dollar}1.0 billion, {dollar}1.0 billion and {dollar}10.0 billion and those with assets greater than {dollar}10.0 billion.; The database included mergers of U.S. banks with target banks assets greater than {dollar}25 million. Initial analysis involved performing correlation analysis of each independent variable with the dependent variable, the target bank's purchase price to tangible book value, which represents the purchase premium paid. Finally, the study performed a stepwise regression analysis to determine which variables were statistically significant in a multiple regression analysis.; The study found that the acquiring bank's management motivation might change as acquiring banks become larger. The significant variables for smaller bank mergers such as target bank capitalization, target bank return on assets, and the use of the pooling of interests method of accounting for the merger indicate that shareholder wealth maximization or financial motivations may drive bank mergers. Conversely, the statistical significance of acquiring bank total asset size and total dollar value of the merger with larger acquiring banks indicates management hubris or self-interest motivating bank mergers. However, the single variable that exhibits statistical significance across all sub-samples was MRGVAL, which indicates that shareholder wealth maximization may be a motivation for small bank mergers; however, management self-interest may often be a contributing factor.