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An empirical study of bank merger influence bank performance in US- a factor analysis
approach

Introduction
The business environment has undergone unprecedented changes in the recent past
due to the numerous dynamics in the global economic atmosphere. Technological advances
and globalisation have altered the way companies do their business. The financial world is
also expanding at an exponential speed. During the last few decades, there have been many
trade agreements and increase in international trade transactions and volumes globally
(Berger, 1998). This integration has markets giving rise to various financial activities that
offer even more attractive choices of investment. Every organisation wants to maximize its
market share and control its future growth (Rezitis, 2008). For organisations to grow in the
globalised market place and achieve a competitive advantage, they must remain strong and
dynamic. Furthermore, the need specialised and precise information before they venture into
new markets. Increased economic reforms and liberalisation in many countries has seen more
banks engage in expansionary activities that include mergers (Rezitis, 2008). Mergers happen
when two businesses in the same industry agree to forge ahead as a joint or single entity with
a view of enjoying mutual benefits (Berger, 1998). Mergers play an important role in the
success of organisations in a globalised world. Their role in boosting and increasing the size
of start ups and their market capitalisation cannot be ignored. Mergers give organisations
several advantages such as speed to marker, speed to positioning and speed to attaining
competitive advantage. Mergers are driven wider economic themes such as the need for
organisations to reconfigure their initiatives and strategies and align them with the macro
events (Rezitis, 2008). They are also driven by the need by organisations to adjust to
externalities that alter their value chain dynamics or their competitive landscape.
Furthermore, the need by organisations to achieve economies of scale both from a product
offering and a geographical perspective has led to several mergers. One of the industries in
the US that has witnessed significant number of mergers is the banking industry. Banks play

a very significant role in the economy of any nation. One of their main functions is to collect
money from sectors with excess funds and lend the money to sectors with insufficient funds.
Therefore, they act as financial intermediaries, a role that helps them determine the
distribution and amount of credit in an economy. Increased bank credits automatically leads
to increased investment in a country. This in turn leads to increased levels of employment.
Therefore, changes in the lending behaviours of banks impacts on a countrys economic
development. Banks alter their lending decisions as they respond to the dynamics in the
banking market and its structure (Rezitis, 2008). Changes in the structure of the banking
industry can affect the position, performance and growth of a bank. There are three main
measures that affect the performance of banks. These are cost, risk and revenue. Overall
performance of a bank is a combination of all the three measures (Rezitis, 2008). The long
term goal of any bank is to maximize the wealth of its shareholders. They do this by
maximising ROE which consists of cost, risk and revenue. Changes in these ROE
subcomponents can increase or decrease the performance of a bank (Rezitis, 2008).
Therefore, to remain competitive and to secure their markets, banks that has their
performance altered by dynamics in the market environment resort to mergers. Mergers can
be defined as unification of two entities or players into a single entity. It is a process whereby
two business entities are combined under common ownership. Oxford dictionary defines a
merger as the process that combines to business into one (Rezitis, 2008). A bank merger takes
place when two banks that were previously distinct get consolidated into one institution. It
occurs when an independent bank becomes part of another existing bank after losing its
charter.
Pressure on banks to increase their revenues has increased merger activities in the US
because this is one of the few ways for them to boost their performance (Rezitis, 2008)..
Particularly, small and regional banks are looking for new ways of increasing their exposure

to loans. The bank industry in the US is being plagued by intense competition in loan
origination. Furthermore, community banks are merging with a view of managing their
concentration and scaling up their loan business (Rezitis, 2008). The liberalization of
geographic based restrictions on banking institutions in United States that started in the late
70s produced a rapid wave of consolidation in the banking sector. Between 1979 and 1994,
there were more than 3500 mergers in the country where two or more banks got consolidated
under one charter. As a result of this wave of mergers, the industry has been in a constant
state of transition. Merger activities were especially strong in the first half of the 90s with
bank mergers involving over 20 % of industry assets annually (Rezitis, 2008).. Mergers and
consolidation in general have lead to a dramatic increase in the size of banks. The mean size
of banking institutions in United States has grown by over 88 percent in from early 80s to
mid 90s. The mean size of complete banking institutions has grown by 110 percent over the
same period (Rezitis, 2008). The amount of mergers in the US has fluctuated immensely
since 2000. Between 2000 and 2002, the numbers of mergers decreased in almost all sectors
in the US. However, there was an increase in the number of mergers in the US between 2002
and 2007. However, the 2007 financial crisis decreased the number of mergers between 2007
and 2009 (Rezitis, 2008). Mergers increased slightly in 2010 but the decrease continued
between 2010 and 2013. However, in the banking industry, mergers increased between 2010
and 2013 but there was a decrease between 2009 and 2010. This phenomenon indicates that
the banking sector follows a different trend as compared to other sectors.
Given the role played by banks in the national economy, it is not surprising that
merger activities among banks have received considerable attention from researchers. There
are several potential benefits that banking institutions have accrued from the lifting of
geographical barriers that limited competition in the industry and the associated wave of
mergers (Rezitis, 2008).. These include increase in geographical diversification, elimination

of selfserving and inefficient managers of banking institution, reduction of costs and

improved competition among others.
Furthermore bank mergers have significant impact in financial stability because the
lead to alterations in market power, competition and concentration. Many researchers argue
that there is a trade off between competition in the banking industry and stability which may
require the intervention of competition authorities and banking supervisors. Chan et al.
(1996) argues that increased competition in the banking markets means that there is an
erosion of the finances or surplus banking institutions can gain after screening the quality of
followers. Reduction in incentives for screening leads to deterioration of the quality of loan
portfolios of many banking institution. More theoretical evidence on market power and bank
risk trade-off is highlighted by Rapullo (2004) and Hellman et al. (2000) and Repullo. They
argue that banks market power has a direct connection with its franchise value, which
reduces the incentives for risk. From an empirical perspective, Beck et al (2006) finds that
crisis in the banking industry are less likely when there is more consolidation. Craig and
Santos (1997) also indicate that consolidation in the United States banking sector has created
a room for increased diversification of risks, which decreases the risk of individual banks.
Despite the high level of merger activity in the American market, little research has been
done about bank mergers. In addition, only a limited number of researchers have investigated
the impact of mergers on bank performance. The increasing importance of commercial banks,
new trends towards big banks and lack of evidence on the effects of large American banks on
the behaviour of bank mergers make it interesting to investigate whether merged banks
perform better than those that have not engaged in merger activities.
Many scholars examined the impact of mergers on bank performance using two
different approaches. Some research analyzed performance of banks around M&A through
providing evidence on stock market reactions for the banks involved in mergers. Other

researchers measured merger effect on bank performance based on accounting data. The
present study aims at analyzing the impact of mergers on the performance of banks. Changes
in performance are measured using accounting data by comparing return on equity before and
after mergers. Additionally, the study analyzes sources of the changes in performance using
several indicators that include cost efficiency, liquidity risk and earning diversification beside
the use of accounting data, the performance of bidder banks will be analyzed through the use
of event study methods that will help in calculation of cumulative abnormal returns of stocks
during the window period. There will deeper analysis conducted with a view of examining
the difference between mergers of a bidder and a listed target and a non-listed target. The
present study will broaden the knowledge about the impact of mergers on the banking
industry.
Literature Review
2.1. Overview
There have been debates on whether merger and acquisitions add any value to a
corporate entity. Critics of mergers argue that they do not necessarily increasing the
productivity of the companies, and instead affecting shareholder wealth negatively. However,
supporters of mergers posit that mergers and acquisitions either maintain or increase the value
of the acquiring company. Furthermore, the shareholders of firms that are selling normally
earn handsome returns from mergers and acquisitions meaning that the value of their wealth
is not compromised by a merger. The reality is that shareholders of the firms that are
acquiring earn the necessary amount of returns on their investments. This means that mergers
maintain the value of the company, contrary to the popularly held belief that they erode
shareholder value. Underling the average returns on investment is a huge dispersion of
outcomes. A close examination of this variability indicates that there are particular
circumstances and characteristics of companies that that are associated with mergers and

acquisitions that increase value. In most cases, the companies that acquire related companies
are received in a better manner by the market. These companies produce the best operating
returns after the mergers than in diversified merger and acquisition transaction, though there
are a number of diversifying transactions that are successful. There are other indicators of
mergers and acquisitions that increase value. These include transactions that involve equal or
smaller targets that are private in nature because the competition for bidding is not as intense
as in standard situations. Furthermore, the deals are structured in a better manner, and can be
easily financed using cash instead of using stock. This makes them flexible.
2.2. Theories on Mergers
There are several theories scholars have used to explain why mergers occur. The first
theory is known as the market power theory. According to this theory, market power is
defined as the potential of one or several market participants to influence the nature of
production, quality, and price the market (Montgomery, 1985). Therefore, market power can
result in uncompetitive high profits that are risk free. Based on this theory, mergers reduce the
number of banks in the market, thus shrinking competition. This leads to higher concentration
in the market in a manner that increases the market power of the banking industry. Therefore,
banks are able to increase prices and gain more profit. So mergers are expected to impact
positively on the performance of both bidders and targets. The second theory is known as the
synergy theory. This theory postulates that the amount of economic value that comes out of a
merger depends on the resources that the merging firms have, relative to the total amount
within an economy, and the availability of opportunities for the firms to use the said resources
(Chatterjee, 1986). Based on this theory, mergers are expected to raise a firms cash flow and
also increase its value through synergy. Synergy increases firms economies of scales and
combined the advantages of two firms. Synergy emanates from the increased revenue as a
result of up selling or cross selling, savings in tax and cost reduction. The theory posits that

the performance of the two bidders is expected to improve according to Hankir et al 2011.
The other theory that explains the reasons why firms merge is the agency theory. Agency
theory argues that managers always have incentives to ensure that their organisations grow
beyond their size. This growth increases the power of a manager by increasing the amount of
resources they control. Furthermore, the growth leads to increased compensation for
managers (Jensen, 1986). According to this theory, managers resort to mergers for their own
personal benefit without any consideration of economic reasons. The final theory is the
information asymmetry theory. Moeller et al, 2007 argues that mergers have a negative
impact on stock returns because an announcement of mergers gives signals to the market that
the stocks of a firm is overvalued. Under this theory, mergers are likely to affect the
performance of bidders negatively.
2.3 Motives behind Mergers
Hillier et al, 2010 explores several reasons why organisations engage in mergers. He
asserts that the first motive is enhancement of revenue. This happens on the realm of strategic
benefits, marketing gains and market power. Marketing gains always have a significant
positive impact on operating revenues. Market power creates a near monopoly by reducing
competition these increasing profits. Palepu et al, (2013) asserts that firms merge to lower
costs. He argues that cost reduction has a significant impact on a firms operating efficiency.
Operating efficiency comes through economies of technology transfer, economies of scale,
improved management and economies of scale. Economies of scale take is the result of
horizontal mergers that ensures that firms share resources thus decreasing operating costs as
they increase the number of products. Palepu et al, (2013) outlines another motive of
mergers. He argues that mergers are meant to improve target management, especially if the
bidder assumes that the target has had a series of systematic underperformance in the market.
Furthermore, mergers help firms to combine complementary resources. Another motive of

merger and acquisition is to improve target management. This happens if management of

bidder firm assumes that the target has systematically underperformed in the market. Pilloff
and Santomero (1996) argue that the main reason for merger is to enhance firm performance.
This can be achieved through various methods. One of them is transfer of managerial
knowhow from the bigger firm to the smaller firm which will lift it to the level of the bigger
firm. The second method is through exclusion of unnecessary human resources and facilities
which leads to cost reduction and increased efficiency. Third, the merged firms combine their
market shares and increase their competitive advantage in the market.
2.4 Forms of Mergers
There are two forms of merger. These are merger and consolidation. Merger involves
absorption of one institution by another. The absorbing institution is referred to as the bidder
while the one being absorbed is known as the target. When mergers take place, the bidder
assumes ownership of all the assets and liabilities of the target. After the merger, the target
firm ceases to exist as a separate firm. On the other hand, consolidation involves merging two
equivalent firms to create a new firm. Firms that engage in consolidation cease to exist as
separate entities and become a whole new entity (Rezitis, 2008). Mergers are different from
acquisition. In the case of acquisition, target forms continue to exist even after the
acquisition, because the bidder just buys shares in the target firm.
2.5. Categories of Mergers
There are three categories of mergers. These are horizontal mergers, vertical mergers
and conglomerate mergers. Horizontal mergers take place when both the bidder and the target
are in the same industry. For example, if a bank merges with another bank, that would be
considered as a horizontal merger (Rezitis, 2008). Vertical mergers take place when firms in
different parts of the value chain or production process merge. For example, if a bank merges
with one of its suppliers or technological companies that make its software that would be

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considered as a vertical merger. The third form of merger is known as conglomerate mergers.
This happens when bidders and the target companies do not have any industry relationship.
For example, if a bank merges with an insurance company, that would be referred to as a
conglomerate merger. Furthermore, mergers can be categorized using a geographical
perspective. Using this mode of categorization, there are two types of mergers. These are
domestic mergers and cross border mergers. Domestic mergers take place when the bidder
and the target firm belong to the same country. On the other hand, cross border mergers take
place when the target and the bidder firms are from different countries.

2.6. Impact of Mergers on Bank Performance

2.6.1. Impact of mergers on efficiency on profitability and efficiency

There are numerous studies that have been conducted to investigate the impact of
mergers on efficiency and profitability of banks. These studies can be classified into two; ex
ante and ex-post studies. The first type of studies assess the effect of a bank merger on
performance by analysing the reaction of the stock market to announcement of mergers while
the latter asses the latter assess the effects of mergers on performance of banks by comparing
the post and pre merger bank performance. This comparison is made using traditional
financial ration analysis or through the use of frontier and econometric analysis. Two main
approaches are normally used in literature to investigate the impact of mergers on bank
performance. One of the approaches studies profitability and efficiency improvements using
accounting based indicators while the other one studies the stock prices of banks that have
merged. The accounting approach involves comparing ratios before and after a merger
(Chronopoulos et al, 2013). The second method argues that changes in the returns of stocks

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indicates the value of the bank at the present and the gains expected in future as a result of the
merger.
Fridolfsson & Stennek (2005) argue that for a clear report about the impact of mergers
on bank performance to be gotten, both approaches must be used together because they are
complementary and cannot substitute each other. They assert that the stock price approach
may not be able to detect the occurrence of an unprofitable merger while the accounting
approach cannot detect the reason an unprofitable merger occurs. Tsangarakis, et al. (2013)
studies a sample of 172 European banks between 2000 and 2006. He found that bidders in
most cases experiences abnormal returns that are statistically insignificant. Further, the
research indicates that bidders that engage in large deals worth over $0.5 billion experience
increase in returns around the date of announcement while bidders in smaller deals only
experience increased returns on the day of announcement. The result of this study indicates
that the market perception of the value of a deal in mergers is influenced mainly by the size
of the deal. The study indicates that bidders of listed targets normally earn negative abnormal
returns of between -2.5 % and -1.04. On the other hand, bidders of subsidiary targets
experience positive abnormal returns of above 0.45% on the date of announcement. Bidders
of targets that have not been listed experience positive returns of between 1.40% and 1.82%,
according to the study. This can be explained by the fact that shareholders expect to get
higher abnormal returns when bidding targets that have been listed. They also expect to earn
lower abnormal returns when making bids for subsidiaries and higher abnormal returns for
targets that have not been listed.
Cornet et al. (2006) examined the operating performance around mergers involving
commercial banks. The study stated that bank operations rise considerably after the merger.
The study also reported that mergers involving large banks lead to higher levels of
performance than mergers where small banks participate. The same study concluded that

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activity diversifying mergers produced less returns than concentrating mergers but produce
more returns than geographically diversifying mergers. Therefore, the research maintained
that mergers amplify significantly the sector-adjusted operating performance of banks
involved. The same study highlighted that improved performance was a result of cost
reduction and increased profitable returns. Cybo-Ottone and Murgia (2000) undertook a study
that consisted of a sample of 54 large European banks for the period between 1987 and 1997.
They came up with significantly positive findings. Compared to the typical market index,
almost half of the bidders in the sample indicated positive CARs. The mean post
announcement abnormal gain for the bidding shareholders was in the area of about 1.5%
while the target shareholders gain an average of between 12 and 15%
Goddard et al (2012) studies a sample of 132 mergers that involved banks in Asia and
Latin America between 1998 and 2009. They found that bidding banks do not experience loss
in value especially in cross-border transactions. They also found that bidder banks tend to
create shareholder value during mergers. Dimitris et al (2013) investigated a sample of 135
mergers in the United States and European banking industry using data from between 1997
and 2003. They found that acquiring banks that get involved in American deals always
experience considerable value destroying within the period around the date of announcement.
On the other hand, European bidders experience statistically considerable positive abnormal
returns during within the period of announcement. Value destruction happens to US bidders
because of the managerial motives and market power of the bidding banks. However, bidders
in Europe experience positive returns because managers of banks in Europe offer lower
premiums. This finding is consistent with that of Hagendorff (2008) who found that bidder
banks in the US usually get negative abnormal returns during the entire event window while
their European counterparts realize positive and statistically considerable abnormal returns
during the whole event window. Studies that used the accounting approach to assess the

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performance of banks after mergers generally find significantly different results. Goddard et
al (2012) investigated a sample of 132 mergers that involved banks in Latin America and Asia
over the period between 1998 and 2009. This study found that bidder banks benefit when
they acquire unprofitable targets because the assets of unprofitable targets are cheap. AlKhasawneh and Essaddam (2012) investigated a sample of 309 mergers in the American
banking industry using date from between 1992 and 2003. The research found that a merger
between a target and a low efficiency bidder creates considerable market returns after the
merger. On the other hand, a merger between a target that is moderately efficient and a bidder
that is least efficient diminishes the value of the bidder. Furthermore, the study reports that
cross-border acquisitions creates more opportunities for bidding banks to get access to new
markets and manage them in a better manner. It also gives them a chance to invest the new
resources they acquire from their targets. Asimakopoulos and Athanasoglou (2013) studied a
sample of 170 bidding banks from the EU using data from between 1990 and 2004. They
found that bidders acquiring targets that have low liquidity, higher credit risk and low
efficiency experience lower value creation because such deals are costly. On the other hand,
bides acquiring targets that have lower diversification of earning experience a more positive
impact to their value.
Van Rooij (1997) argues that even if bidders are cost efficient ex ante, a factor that
should ensure that they transfer efficiency to targets, there is no evidence of such an
opportunity being realised after a merger. When compared to non merging banks, mergers do
not indicate significant improvements in efficiency (Rooij, 1997). Al Akhavein et al (1997)
asserts that banks usually have costs that are between 20 to 25 percent above the costs of
those observed in best practice banks which suggests that cost efficiency could be improved
significantly by a merger. However, they report that such potentials are rarely realised

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systematically in practice. Therefore, the consensus is that bank mergers lead to little
efficiency improvements.
Vennet (1996) investigated the effect of mergers on efficiency in European banking
industry using a stochastic frontier analysis and a number of crucial financial ratios for the
period between 1988 and 1994. He found that mergers improve the participating banks
efficiency. Akhavein et al. 1997 investigated the efficiency effect of megabank mergers in the
US banking industry. They found that most banks experience efficiency improvements and
increase in profits after mergers. However, Berger et al. (1998) did not find any significant
improvement in efficiency for mergers in the case of both small and large banks. Gourlay et
al. (2006) investigated the efficiency gains from mergers in the Indian banking industry for
the period between 1991 and 2005. They observed that mergers led to efficiency
improvements for the participating banks. Bain and Cy (2000) examined the shareholder
value and its development for 50 of the biggest bank mergers of the 1990s. The investigation
covered a number of event windows that ranged from three days before merger
announcement to the final completion, and also investigated the mergers a year, two years
and three years after the completion. The study found a marked improvement in performance
for the merged banks immediately after the mergers but the performance stagnates after
several years. Valkanov and Kleimeir (2007) used a sample of bank mergers from the US and
European market to investigate the impact of mergers on shareholder value. Evidence from
the US suggested that bank mergers only provide value for the targeted banks and destroy
value for the bidder banks. In the European market, they found that mergers create value for
the target banks but do not have any significant value destroying effect on the bidder bank.
Marks (2006) reported that three quarters of all mergers do not realize their strategic and
financial goals. This corroborates the findings of Srinivasan (1992) who concluded that
mergers do not necessarily cut cost on the non interest expenses of banks

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2.6.2. Impact of mergers on risk

Studies that present evidence on the relationship between consolidation and the
attitude of banks to risk argue that mergers cab reduce bank risk. Craig and Santos (1997)
examined the risk effects emanating from mergers. Using a sample of mergers from between
1985 and 1991, they found that the risk of the newly formed firm after a merger is lower than
that of the two firms before the merger. This finding indicates that bank mergers produce
organisations that are less risky meaning that diversification of gains could be one of the
motives for banks to merge. Boyd and Graham (1998) examined potential of risk reduction of
mergers between banks and other financial institution through a simulation of cross-industry
mergers. Using data from between 1970 and 1980, they found that some types of mergers
create diversification benefits. Particularly, they found that merging a bank with life
insurance firms reduces the bankruptcy risk of a bank. On the other hand, a merger between a
bank and another financial institution increases risk. Lown et al (2000) investigated the same
types of mergers that Boyd and Graham (1988) had investigated. They used data between
1985 and 1999, and got the same results. Hughes et al, (1999) simulated diverse
consolidation strategies of banks and found that interstate expansion in United States can
easily lead to reduced risk of insolvency. Mishra et al. (2005) used a sample of 20 bank
mergers in the United States to conduct an empirical examination of changes in risks for
banks that have merged. They focused in the non-conglomerate merger types. They found
evidence that suggests that non-conglomerate merger types significantly reduce risks for the
merged banks. They also argue that the motive for bank mergers is diversification. Chionsini,
Foglia and Reedtz (2003) used data for bank mergers between 1996 and 2000. They found a

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significant risk reduction for merged banks. They argue that risk reduction happens because
of diversification of risks that are idiosyncratic in nature. However, there is another group of
studies that presents evidence that banks tend to be riskier after mergers than before mergers.
Chong (1991) found that interstate bank mergers in the US normally increase the volatility of
their stock returns. Amihud, DeLong and Saunders (2002) investigated cross-border mergers
that involve banks in different countries. They found that cross-border mergers between 1984
and 1998 did not have any effect on the risk levels or stock price of the acquiring bank. This
means that benefits from diversification are offset by monitoring issues that are associated
with foreign operations. Di Nicolo et al. (2003) investigated the link between mergers and
risks for a sample of large banks between 1994 and 2006. They find that moral hazard
incentives motivate large banks that merge which means that they exhibit higher levels of risk
taking behavior than smaller banks. Additionally, moral hazards outweigh the reduction of
risks that can be achieved through economies of scope or scale and through product or
geographical diversification. Boyd and Graham (1998) suggests that one of the most vital
sources of moral hazard in the banking industry is a syndrome known as too big to fail. This
syndrome makes banks take excessive risks without any concern for effective techniques of
risk management because they believe that governments will provide them with safety nets.
There is enough empirical evidence that suggests that after mergers, banks take more risk due
to TBTF. OHara and Shaw (1998) have examined the impact of TBTF banks and report that
the banks that find themselves in this category that receives higher returns by investing in
riskier ventures than those institutions that do not have a TBTF status. They also argue that
banks that become TBTF through mergers are valued more by market participants. Therefore,
the TBFT perception is one of the motives for mergers. Kane (2000) examined banking
mergers between 1991 and 1998. His report indicates that shareholders of banks that merged
gained value from the increase in size. He also concluded that banks that engage in mergers

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hope to benefit from the systemic risk exemption offered by the government. Additionally as
also indicated by Shull and Hanweck (2001), TBF policy automatically provides an incentive
for mergers especially by big banks.
2.6.3. Impact of mergers product provision and standards of service
The number of financial products that banks offer to their customers has increased over the
last two decades. The increase can be attributed to several related developments. One of these
developments is the increased competition between providers of financial service (Berger,
1998). The second is changes in regulation that have made it possible and easier for financial
companies to enter into new product and geographical markets (Rezitis, 2008). Therefore, the
American financial services market has become increasingly complex and divided (Berger,
1998). However, there is little evidence on the impact of mergers on the products that banks
provide to their customers. There are several studies that have investigated the impact of
changes in product provision as a result of mergers on the post merger performance of banks.
Boyd and Graham (1998) assert that mergers often lead to disappearance of products. After
bidder mergers with a target, some of the products that the target was offering its customers
get discontinued. When products that were offered previously by a bank disappear, the
customers that were signed to that product are also likely to disappear (Rezitis, 2008).
Therefore, he argues that disappearance of some of the products that were on offer before the
merger leads to loss of customers, which can impact negatively on the post merger
performance of some banks. Di Nicolo et al. (2003) argue that mergers often affect customer
loyalty. He argues that mergers often lead to closure of some branches meaning that
customers can no longer get services they used to get from closed branches (Berger, 1998).
Such customers are likely to shift to other banks in their neighbourhoods rather than follow
their former bank (Berger, 1998). The changes that take place after mergers are also likely to
how customers perceive a bank. This might force them to look for alternative banks as a way

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of expressing their dissatisfaction with the new developments. One of the motivations of bank
mergers is to improve efficiency and increase profits. One of the ways of achieving this is
minimising the number of branches and re-engineering. During most mergers, there is a
reduction in the number of employees (Berger, 1998). Closure of branches and reduction of
employees automatically reduces the level of service provision for some customers. Closure
of branches implies that some customers have to travel far to get banking services (Berger,
1998). This affects those who are less mobile. Furthermore, reduction in the number of staff
after mergers affects the quality of service delivery which is reflected on the performance of
banks (Rezitis, 2008). It makes it hard for customers to engage in face-to face discussions
with bank staff, according to Di Nicolo et al. (2003). He argues that even though there is a
marked growth of remote services such as mobile banking and ATMs, they may not be of
adequate service to disadvantaged groups, especially those who do not have access to phones.
Losing part of a banks customer base is likely to impact negatively on its performance
(Berger, 1998). The increased physical, technological and social distance between banks and
some of the disadvantaged groups after mergers has encouraged the growth of informal and
predatory financial service providers such as money lenders who eat into the markets of
established banks (Rezitis, 2008). Increased competition from the informal financial service
sector can affect the performance of a bank negatively.
2.6.4 Impact of listing status of target on bidder performance
Many researchers believe that the performance of a bidder is higher when the target is listed.
The preferences of investors found in the financial markets are mainly driven by the
information they analyze, information helps them to predict future performance of a company
(Berger, 1998). More information helps them to make better decisions. However, lack of
information negatively affects their decision making ability. Listed companies typically give
more information than their non listed counterparts (Rezitis, 2008). The same principle

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applies in the banking industry. Listed banks give more information than banks that have not
been listed. This reduces instances of informational asymmetry. Therefore merging with
targets that have not been listed destroys value for bidders. On the other hand, mergers with
listed targets increases value for the bidders, which positively impacts on their performance.
2.7 Summary of Literature
Most studies that have tried to capture the impact of bank mergers on post merger
performance show that there is negligible payoffs or fewer loses and considerable negative
returns some time after. It appears that most bidders usually outperform the markets before
the event, implying that their position becomes worse after the merger. However the returns
to shareholders of the target banks are seen to be positive. This implies that mergers create
wealth. Studies that have investigated the effects of mergers on profitability and efficiency
indicate that mergers improve efficiency and profitability of banks. However deeper analysis
indicates that performance of bidder banks declines if its value is higher than the average of
the banking sector. This happens because there is increase in cost inefficiency, decreased
revenue enhancement, increased liquidity risk and increased asset impairment. Analysis of
stocks shows that there is a negative but not so significant impact of mergers on performance
of bidder banks. However, accounting analysis show a significant negative performance of
bidder bank after an acquisition. The debate on the performance of bidder banks after mergers
is continuous. A clear understanding of this issue can be gotten if more studies are conducted
at the country level to investigate whether the impact is the same in different countries. The
performance of bidder banks after mergers could be as a result of external factors such as
regulations and macroeconomic elements. Future research should examine the impact of
mergers on other indicators such as the value of bondholders and overall performance of the
entire banking industry.

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List of References
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scope: a review of empirical literature, Research Memorandum WO&E, 511/9726,

Amsterdam: De Nederlandsche Bank.