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Author: Sigve Skrikrud
Supervisor: Tor Eriksson

Bachelor’s Thesis

Horizontal Merger Effects

An analysis of mergers in the US banking industry

Aarhus University
School of Business and Social Science
Department of Business Administration
Bsc(B) 6. Semester

May, 2015

Pages: 50
Characters (excl. blanks): 89 207
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 Executive!Summary!
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This thesis is concerned with the horizontal merger topic, and possible effects following
such mergers. The thesis includes theory, literature review and empirical research to
investigate possible merger effects. For the empirical research, the US Banking industry is
used to investigate how some given efficiency variables changed for merging banks
compared to non-merging banks.

A horizontal merger may lead to a reduction in consumer welfare caused by increased

market concentration, or increased consumer welfare through efficiency gains following a
merger. The Williamson trade-off model is discussed as a theory of how to evaluate
welfare losses and gains. The model emphasizes the importance of efficiency gains in
relation to aggregate surplus. According to the model, a relatively small increase in
efficiency will allow for a bigger price increase, and still be beneficial for society as a
whole. This is however only found to be true in a market with perfect competition.
The antitrust authorities are the governmental organ that is responsible for ensuring
competition, and making sure that a planned merger does not harm the competition. They
evaluate whether a merger should be investigated through the Herfindahl Hirschman
Index, which is a measure of market concentration.

The motives for integrating horizontally are many, and are in this thesis split into two
groups: (1) Profit-maximizing motives and (2) non-profit-maximizing motives. The
profit-maximizing motives discussed were potential efficiency gains that may be realized
from a merger. Such efficiency gains may be realized through Economies of scale, which
may be achieved through large-scale production, indivisibilities, specialized and learning
economies. Economies of scope may also be achieved by producing different output using
the same set of recourses. Thirdly, Rationalization may be achieved by shifting the
production from one plant to another. Avoiding Duplication of effort is another benefit,
which means that the two merged companies now can work together to develop new
technologies. Purchasing economies may also occur, which means that the bargaining
power of the newly integrated firm increases, because of its larger scale and increased
importance to the market. Enhanced knowledge and technology may also increase the
efficiency through diffusion of know-how following a merger.
Non-profit-maximizing motives may be Growth maximization, which concerns the
problem when managers aim for fast growth at the expense of maximizing profits.
Another motive is the concept of Market for corporate control, which is when the market
perceives a company as underperforming, and where the buyer thinks he can use its assets

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more efficient. The failing firm hypothesis is another motive, which emphasizes that a
merger may be the only way to avoid bankruptcy.
It was found 3 sources of risk related to mergers. The first problem is the possibility of
Dis-economies of scale, which may occur if the scale of business is increased too much.
The costs related to the mergers such as transferring assets, and achieve fully integration
was also found to be of considerable risk. The third problem that may arise is that the
output flexibility may decrease because of the increased firm size.

The empirical research was conducted by comparing the performance of a group

consisting of merging banks, to a control group. This was done by looking at 3 pre-
defined variables; Cost-to-Income Ratio (CIR), Return on Assets (ROA) and Profit per
Employee (PPE). All 3 variables is assumed to represent the following efficiency
categories; CIR is assumed to represent cost-efficiency, and how efficient the banks are in
minimizing costs while increasing profits. The ROA is assumed to be a measure of how
efficient the banks are able to manage its assets. The PPE is assumed to be a measure of
employee productivity, and hence an increase in PPE would be interpreted as increased
employee efficiency.
It was not found any significant differences between the two groups, and it was concluded
that efficiency gains did not occur following mergers in the US banking industry.
It was further found that the Target banks were the least efficient group for all variables
during the pre-merger period, which indicates that market for corporate control might be
the reason for why the mergers occurred. Years with significant changes and differences
showed high standard deviations, making those findings less reliable.

I would like to thank and acknowledge my supervisor Professor Tor Eriksson at Aarhus
University, Department of Business and Social Science for helping me with suggestions
and feedback during the 4 months of research.

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Table!of!content!
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Executive!Summary!.................................................................................................................!2!

Chapter!1:!Introduction!.........................................................................................................!6!
1.1!Introduction!..................................................................................................................................!6!
1.2!Research!Question!......................................................................................................................!7!
Chapter!2:!Theory!and!antitrust!considerations!...........................................................!8!
2.1!Williamson!tradeEoff!Theory!...................................................................................................!8!
2.2!Antitrust!policy!and!market!concentration!....................................................................!11!
2.2.1!Antitrust!.................................................................................................................................................!11!
2.2.2 Market concentration!..........................................................................................................................!12!

Chapter!3:!Motives!for!Horizontal!Mergers!...................................................................!13!
3.1!Profit!maximization!and!cost!savings.!..............................................................................!14!
3.1.1!Economies!of!scale!.............................................................................................................................!14!
3.1.2!Economies!of!scope!...........................................................................................................................!16!
3.1.3!Rationalization!....................................................................................................................................!17!
3.1.4!Duplication!of!effort!..........................................................................................................................!17!
3.1.5!Purchasing!economies!.....................................................................................................................!17!
3.1.6!Enhanced!knowledge!and!technology!......................................................................................!18!
3.2!NonEprofit!maximizing!motives.!.........................................................................................!18!
3.2.1!Growth!maximization!.......................................................................................................................!18!
3.2.2!Market!for!corporate!control!........................................................................................................!19!
3.2.3!The!failing!firm!hypothesis.!...........................................................................................................!19!

Chapter!4:!Potential!downsides!and!risks!related!to!mergers!...............................!20!
4.1!DisEeconomies!of!scale!...........................................................................................................!20!
4.2!Merger!costs.!..............................................................................................................................!21!
4.3!Output!flexibility!......................................................................................................................!21!
Chapter!5:!US!Banking!Industry!Research!.....................................................................!22!
5.1!Introduction!...............................................................................................................................!22!
5.2!Literature!review.!....................................................................................................................!23!
5.3!Hypotheses!.................................................................................................................................!24!
5.4!Methodology!..............................................................................................................................!26!
5.4.1!Research!method!................................................................................................................................!26!
5.4.2!Data!collection!.....................................................................................................................................!27!
5.4.3!Reliability!and!Validity!....................................................................................................................!28!
5.4.4!Estimation!and!calculation!............................................................................................................!29!
5.5!Assumptions!and!Limitations!..............................................................................................!30!

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 5.5.1!Assumptions!.........................................................................................................................................!30!
5.5.2!Limitations!............................................................................................................................................!31!
5.6!Findings.!......................................................................................................................................!32!
5.6.1!Hypothesis!1:!.......................................................................................................................................!32!
5.6.2!Hypothesis!2:!.......................................................................................................................................!37!
5.6.3!Hypothesis!3:!.......................................................................................................................................!40!
5.7!Conclusion!..................................................................................................................................!41!
5.7.1!Empirical!conclusion!........................................................................................................................!41!
5.7.2!Further!discussion!and!considerations!....................................................................................!42!
5.7.3!Further!research.!................................................................................................................................!43!

Chapter!6:!Conclusion!...........................................................................................................!44!

Reference!List!..........................................................................................................................!46!

Appendices!...............................................................................................................................!50!

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 Chapter!1:!Introduction!

This%chapter%will%first%give%a%brief%introduction%and%background%to%the%
topic%before%presenting%the%chosen%research%question%

1.1!Introduction!
A merger takes place when two companies join together to form one single company.
There are mainly three types of mergers: horizontal, vertical and conglomerate mergers. A
vertical merger occurs when two companies that operate in different stages of the same
production process joins together. A conglomerate merger on the other hand, occurs when
companies that produce different goods or services merge. The topic of this paper will be
horizontal mergers, which involves companies producing the same products or services.
This type of merger may be more complicated than the other types, and does often attract
the attention of the antitrust authorities (competition authorities), because a horizontal
merger may lead to undesirable outcomes such as increased market power and a reduction
in consumer welfare. The anti-trust authorities will often investigate the expected impacts
resulting from a planned merger, and evaluate if the merger effects will be positive or
negative for consumers and society.

The history of horizontal mergers is long, and many of the world’s greatest corporations
were formed through horizontal mergers. Companies such as Exxon Mobile, JPMorgan
Chase & Co and Sony Ericsson (now Sony Mobile Communications Inc.) were all created
through such mergers. The reasons for mergers are many, and throughout this paper the
most common as well as some less common reasons will be discussed. However, mergers
happen as a part of a strategy, and one can say that a merger is a strategic choice to
improve an organization. What kind of improvements a merger is supposed to address is
not given, and depends from case to case.

This Bachelor Thesis will go in depth of the topic Horizontal Mergers, explaining various
theories and concepts, giving a full understanding of the complexity of the topic, as well
as what companies may achieve by integrate horizontally.
The backbone of this thesis will be an empirical part, investigating mergers in the US
banking industry that occurred during the years of 2007 and 2008. The research will aim
to analyze whether or not these mergers led to any significant changes in some predefined
efficiency variables.
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1.2!Research!Question!
Researchers have not been able to come to an agreement in the discussion about
horizontal merger effects, and if such mergers lead to increased profitability through
increased market power or cost savings, and the empirical evidence is rather inconclusive
(Lipczynski, Wilson & Goddard, 2013). Within this field, the two most common research
areas is (1) the price effects resulting from increased market power following a merger
(Prager & Hannan, 1998; Borenstein, 1990), and (2) the efficiency gains that might arise
after a merger ( Peristiani, 1997; Ravenscraft & Scherer, 1987). Price effects are
researched because of its importance in relation to potential decreased consumer welfare
and issues faced by the antitrust authorities. Efficiency gains are on the other hand
focused on potential increases in consumer welfare following a merger.

The main goal of this thesis is to give a clear understanding of what effects that may be
expected as a result of horizontal mergers. Even though the thesis is focused on the
positive gains of such mergers, some negative effects will also be discussed to provide a
broader picture of the topic.
In addition to explaining theory and concepts, the thesis will include its own empirical
research, aiming to investigate whether or not efficiency gains actually happened
following US banking mergers during 2007-2008.
Based on these goals, the thesis will aim to answer the following research question:

How may Horizontal mergers increase the efficiency of the participating firms, and did
such efficiency gains occur for US banking mergers during 2007-08?

The research question is designed to be dependent on both, a theory part, and an empirical
part. The first part will be answered using various economic theories and concepts, and
look at what possible effects a merger may have on an organization. This part of the
research question will give an insight in what an organization actually can expect from a
merger.
Theory does not always reflect reality, and therefore the second part aims to test if the
theories actually predict the effects of real-life mergers. The empirical research of this
thesis will be used to answer the second part of the research question, using my own
research, as well as previous work done on the topic.

To obtain a clear and detailed answer to my research question, some additional sub
questions will be investigated. The first sub question will aim to determine what motives
companies have when merging, and what they might hope to obtain as a result of the

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merger. Hence the first sub question is: “What motives exists for integrating
horizontally?”
I find it important to highlight the possible downsides and risks related to a merger, to
ensure that the reader of this thesis is aware about that a merger is not a risk-free choice.
This question will also emphasize that problems may occur as a result of governmental
regulations, and may not always be up to the participating firms themselves. The second
sub question will ask the following question: “What problems may occur as a result of
such mergers?” The last sub question will be directly aimed at the empirical research:
“Did US banking mergers lead to efficiency gains for the participating firms?”
To summarize, the 3 sub questions are:

1. What motives exists for integrating horizontally?

2. What problems may occur as a result of such mergers?
3. Did US banking mergers lead to efficiency gains?
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Chapter!2:!Theory!and!antitrust!considerations!

In%this%part%of%the%thesis,%a%trade:off%theory%and%the%importance%of%
market%concentration%and%antitrust%regulations%will%be%discussed.%

2.1!Williamson!trade@off!Theory!
The Williamson trade-off theory will be explained as a theory of how to evaluate the
importance of price-effects in relation to cost-savings following a horizontal merger.

When companies decide to merge, there are mainly two reasons for that. The first reason
is that as the two companies joins together they may be able to increase prices caused by
their increased market power. This is from the society´s point of view, a negative effect,
and there will be a negative effect on the consumer welfare. The second reason is various
efficiency gains, which may allow the merged firm to reduce prices due to lower costs,
and is a positive effect from the society´s point of view. In other words, one have the
possibility of increased prices due to increased market power, and one have the
possibilities of lower prices caused by efficiency gains. Williamson (1968) suggested a
model, which is about balancing any increased market power (reduced competition)
against the possibility of productivity improvements resulting from a merger.
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Figure!1!@!Williamson!Trade@off!model.!

Figure 1 shows the basic mechanism of the Williamson trade-off. First it is assumed that
the industry is perfectly competitive, with a price equal to costs, or p=c. In this scenario,
there is no profit for the firms operating in this market. The aggregate social surplus is
here the area represented by ABC. Then, after a horizontal merger takes place, we have
two changes. First, the price may increase, caused by the increased market concentration.
The price goes from c to p´. At the same time, because of increased efficiency within the
integrated firm, they are able to lower the costs from c to c´. This means that the
aggregate social surplus post-merger is represented by area ADEF. The main point here is
the comparison between the dead weight loss (area FGC) and the area gained (blue area
DEGB). If there is cost savings, and no price increase, there will be a significant increase
in aggregate surplus, because the consumer will not have to pay more for the goods, and it
will be cheaper for the supplier to produce the goods. However, if there is no cost-savings
resulting from the merger, and only price increase, there will be a loss in aggregate
surplus, and the surplus would in that case be represented by area ABGF. One of
Williamsons main points is that the cost-savings didn’t have to be that huge for a merger
to be beneficial to society. A relatively small cost-reduction would allow for a price
increase, and still contribute to aggregate surplus.
This model is however based on some important and one might say critique-worthy
assumptions, which is discussed by Whinston (). The first assumption is that the pre-

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merger market is a perfectly competitive market, meaning that prices are equal to costs.
This is a common assumption in many models within economics, however it is most
likely not consistent with reality which makes the model less useful in practice. Figure 2
shows the different outcome if prices exceed marginal costs.
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Figure!2!@!Williamson!Trade@off!without!perfect!competition!

As one can see from figure 2, if the initial market has a cost of c and a price of p, which is
very often the case in real life scenarios, the dead weight loss is very different when
increasing prices to p´. Figure 2 show us that if we have a market without perfect
competition, hence prices are higher than costs; a price increase will more likely lead to
decreased aggregate surplus, even though costs are reduced.
The second assumption is that aggregate surplus is better, no matter how the surplus is
divided. For example, this model argues that a merger is positive, even though the
supplier is left with the entire surplus. In the eyes of the antitrust authorities for instance,
the definition of increased welfare, is not just aggregate surplus. The consumer welfare is
one main important factor when it comes to evaluating the positive or negative effects of
a horizontal merger, meaning that to look at only the aggregate surplus is not enough.
Third, prices are according to this model the only competition interactions among the
companies. This is again something that distances the theory from the truth, because in

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real life, companies are competing on other things than only price. Focus on quality,
service, differentiation, and technology is just some of the many competitive areas.
The fourth assumption is that the model assumes that the marginal cost will be equal for
all firms, even for the companies that do not merge. To assume that the marginal cost is
equal for all firms before merger is generally a necessary, and not that controversial
assumption, even though this most likely is not the case in real life either. However,
Williamson assumes lower marginal costs for all companies in the industry, when in most
cases there are only cost savings for the merged firm. This assumption contributes further
to the distance between theory and practice.
All in all, this theory has some interesting points, emphasizing the potential surplus the
society will gain from a merger. It shows that, based on its assumptions, a merger that
leads to costs savings, and an increase in prices is still likely to be beneficial to the
aggregate surplus. However as mentioned, the model is based on some assumptions that
should be considered to fully understand its limitations.
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2.2!Antitrust!policy!and!market!concentration!
The purpose of this chapter is to give a brief explanation of what the antitrust authorities
are, and the purpose of their policies. Further, the estimation of market concentration will
be explained to provide a better understanding of how the antitrust authorities uses market
concentration to evaluate mergers.

2.2.1!Antitrust!!
A horizontal merger might harm competition, and hence lead to negative effects on
consumer welfare. To ensure that such mergers do not harm the society, antitrust
authorities, commonly known as competition authorities, are responsible for evaluating
what possible effect a merger is expected to induce. According to the United States
Department of Justice; “The mission of the Antitrust Division is to promote economic
competition through enforcing and providing guidance on antitrust laws and principles”.
In addition to mergers, antitrust laws apply to all industries and industry level of business
and prohibit a variety of practices that harm competition such as cartels, which includes
price-fixing and fixed output etc.

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The antitrust authorities use the Herfindahl Hirschman Index (HHI) to classify whether a
market is competitive or not and has issued the following guidelines:

• A market with HHI below 1500 is defined as unconcentrated (competitive)

• HHI between 1500 and 2500 is defined as moderately concentrated
• HHI above 2500 is defined as highly concentrated

A merger resulting in an unconcentrated market, hence that HHI stays below 1500 will
not be subject to antitrust investigations.
A merger that leads to an increase of more than a 100 on the HHI, resulting in a
moderately concentrated market place may raise significant competitive concerns and
may require further investigation.
Mergers increasing the HHI of between 100-200, and lead to a highly concentrated
market will raise significant competitive concerns and often warrant investigations. A
merger leading to a highly concentrated market and involves an increase of HHI of more
than 200 will be presumed to be likely to enhance market power, and may be prohibited.

One should note however that the antitrust authorities consider the overall case when
evaluating a particular merger and not only market power. Arguments such as that one or
both companies may go bankrupt if staying independent will count in favor of the planned
merger.
Next sub chapter will explain how to measure market concentration.

2.2.2 Market concentration

One of the biggest issues with horizontal mergers is that they lead to a reduction in the
number of firms operating in the given industry, which again lead to increased market
concentration. To what extent the market concentration is increased depends heavily from
case to case. However, one important factor when antitrust authorities evaluates a merger,
is the expected increase in market power, and what consequences it will have on
consumer welfare.

The US Department of Justice defines market concentration as a “function of the number

of firms in a market and their respective market shares.”
There are many ways of measuring market concentration such as the previously
mentioned Herfindahl Hirschman Index (HHI), but also other methods such as the n-firm
concentration ratio (CR ! ), Hannah and Kay index, The Entropy Coefficient and Variance
of the logarithms of firm sizes.

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In this sub section, the Herfindahl Hirschman index (HHI) will be explained because this
is the most important method in relation to the antitrust authorities.
The HHI is a commonly used method, and is as mentioned used when American and EU
antitrust authorities evaluates planned mergers. The method was suggested by Hirschman
(1945) and Herfindahl (1950), working independently, however, both suggested the same
measurement method. The HHI score ranges from 0 to 10 000 (or 0 to 1, depending on
preference) and is based on the sum of the squared market shares of all firms in the
industry, and is hence based on the following formula:
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HHI = s!!
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Where s! is the market share of firm i, and N is the total number of firms in the industry.
To provide a clear understanding of the method, and example will be used: Assume an
industry with 10 firms. The biggest player has 40% market share. The next 3 have 10%
each and the remaining 6 have 5% each. To calculate the HHI in this industry is done as
follows:!HHI = 40! + 3 ∗ 10! + 6 ∗ 5! = 2050.
This score is defined as a moderately concentrated market place according to the
classification mentioned in chapter 2.2.1.

Even though there are many theories of how market concentration should be measured,
the HHI is most commonly used, and is as mentioned earlier, used by both the US and EU
to evaluate weather or not a merger should be challenged by law.
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Chapter!3:!Motives!for!Horizontal!Mergers!

Why%companies%decide%to%merge%is%not%always%clear.%This%chapter%will%
discuss%possible%merger:benefits%and%other%merger:motives%

There are many reasons for why horizontal mergers occur. To integrate horizontally is a
strategic decision based on various reasons, depending on the goals possessed by the
company and/or management. This chapter will explain and discuss various motives for
merging, and will be split into two parts; (1) Profit-maximizing motives and (2) Non-
profit-maximizing motives for horizontal mergers.
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3.1!Profit!maximization!and!cost!savings.!
This sub section will discuss some profit maximizing motives as a result of efficiency
gains following horizontal mergers. In other words, how might the costs decrease and
profitability increase, as a result of a horizontal merger?
The section will discuss the following potential efficiency gains:

3.1.1 Economies of scale

3.1.2 Economies of scope
3.1.3 Rationalization
3.1.4 Duplication of effort
3.1.5 Purchasing economies
3.1.6 Enhanced knowledge and technology
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3.1.1!Economies!of!scale!
Economies of scale occur as a result of a bigger scale of a business, and is frequently used
as argument to defend a proposed merger (Roller, Stennek & Verboven, 2006). If a
company wants to achieve economies of scale, it has to increase its output. This is done
by expanding, either through internal, or external growth. Horizontal merger is one way
of external growth, and may lead to an economies of scale effect. Figure 3 below
illustrates how it works.
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Figure!3!E!Economies!and!DisEeconomies!of!scale!

Before merging, one will produce a quantity equal to Q, at a marginal cost of c

represented by point A in figure 3. When merging however, the newly integrated
company may be able to spread the fixed costs over a larger output. This means that the
cost per unit will decrease. After realizing economies of scale, one will produce a quantity
of Q1, to a cost per unit of c1 represented by point B. Point B represents the main idea of
economies of scale; producing a bigger quantity to a lower marginal cost.

The increased cost-efficiency may occur through various reasons such as Large-scale
production, Indivisibilities, specialized and learning economies (Lipczynski, Wilson &
Goddard, 2013).
As mentioned, when producing a larger quantity, it is likely that the costs associated per
unit decreases. The reason for this is that the costs will be spread out over a larger
quantity. For example, if Apple only made 5 units of iPhone 6, the cost per unit would
probably be hundreds of millions of dollars considering all the research and development
costs as well as new machinery associated to the production of a new iPhone. However,
since Apple is such a big company and sells over a hundred million iPhones a year, they
are able to produce it to only a couple of hundred dollars per unit. This is because the
fixed costs for producing 5 iPhones will be about the same as if one produces a hundred

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million iPhones. The only main difference will be the variable costs, such as the purchase
of the materials to make one unit.

Indivisibilities of capital and labor inputs is also an important source of economies for the
large company (Lipczynski, Wilson & Goddard, 2013). The main concept behind this is
that a larger scale company may be able to use new and more efficient production
methods that a smaller company can´t. This might be investment in expensive mass-
production machinery, which will be beneficial only to a large-scale company because the
high machinery costs will be divided by so many units. If a small company were to buy
the same machinery, the cost per unit would be much higher since the expensive
machinery costs would be spread over a smaller number of units.
Also, as the scale of production increases, the company may be able to specialize its
employees more, leading to even greater efficiency (Spence, 1981). This is because a big
company usually needs more employees than smaller companies, and hence the
employees may be set to have responsibility for a smaller area within the production.
Over time, the employees will become more skilled and efficient as they repeat the same
task over and over again.
It should be noted that Farell and Shapiro (2000) has challenged the economies of scale
argument within this topic, suggesting that there are relatively few horizontal mergers that
has led to economies of scale. They claim that economies of scale often is realized by
internal expansions, and do not require a merger.

All in all, figure 3 basically shows the concept that one may expect lower marginal costs
when increasing output. However, this may only be true to some extent. As one can see
from figure 3, there is a point C that tells a different story. This will be discussed later in
chapter 4.

3.1.2!Economies!of!scope!!
Economies of scope occur when a company saves costs by producing two or more outputs
using the same sets of recourses. This means that producing several goods or services
together, is less costly than producing each of them separately. This phenomenon is in
some way related to economies of scale as it also is about spreading fixed costs etc. At a
first glance, one might think that economies of scope is not related to horizontal merger,
because horizontal mergers is about producing basically the same goods. However, two
horizontal companies might also offer different goods, and for example two banks might
offer slightly different services in addition to common services.

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3.1.3!Rationalization!
Rationalization refers to the cost savings achieved from shifting the production of output
from one plant to another plant, without changing the company´s joint production
possibilities (Roller, Stennek & Verboven, 2006). Rationalization is hence about an
optimal allocation of the production levels across the different plants of a company.
Before two companies merge, their marginal cost may differ due to various reasons such
as scale of production, technologies employed, different knowledge etc. After the merger
however, the company becomes a so-called multi-plant firm, and cost savings can be
realized by moving the production from the plant with a high MC to the plant with a
lower MC. When the marginal cost is equal for both plants, the company has achieved
“full rationalization”. Rationalization may also require one or several production plants to
shut down.
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!3.1.4!Duplication!of!effort!
Another advantage of merger is that it enables the integrated company to exploit the
Economies of scale effect in R&D, and avoid wasteful duplication of effort (Grossman &
Shapiro, 1986). This means that instead of two independent companies doing the same
research on basically the same technology, an integrated company will allow for a more
efficient R&D. The main point may be illustrated by an example using company X and Y.
Assume that both companies are doing research on technology Z. Both companies spends
100 million $ each to develop Z. However, if the company merged before this scenario,
hence company XY were to develop technology Z, they would probably spend only 100
million $ combined. In addition, the R&D process may be even more efficient due to the
specialized employees (ref. Economies of scale). The example illustrates how company
XY may save 100 million $ compared to the independent research of X and Y.
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3.1.5!Purchasing!economies!
A merger may increase the bargaining power of the firm. This is because the merged
company is likely to buy more materials/services, and hence be able to extract lower
prices from its suppliers. The bargaining power depends on factors such as seller and
buyer concentration, and the integrated firm will be in a stronger position if there are few
buyers and many suppliers of the given input. However, the purchasing economies
concept is also related to economies of scale, because economies of scale allows the
company to buy large quantities in bulks, which usually gives discounts and a stronger
position when bargaining. Mergers may also result in purchasing economies even though
there is no increased market power. Some suppliers operate with two-part tariffs,
consisting of some non-linear pricing scheme such as a fixed fee as well as a price per

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unit. These schemes are used for price-discrimination between big-scale customers and
low-scale customers. A merged firm may result in becoming a big-scale customer, and
hence obtain a smaller cost per unit, even though their bargaining power stayed the same.

3.1.6!Enhanced!knowledge!and!technology!
Different companies often posses’ different capabilities and technology due to different
experiences, organizational culture, management, patents etc. When merging, a desirable
outcome would be to combine all the best characteristics of the two firms, resulting in one
big excellent company. This concept may also be referred to as Diffusion of know-how
(Roller, Stennek & Verboven, 2006). The diffusion of know-how may be split into two
main scenarios.
The first scenario is that among the two merging firms, one of them have the superior
know-how on all areas. This allows the merging partner to learn and adopt all skills of the
superior firm. The integrated company will hence be a bigger company with (after some
training and knowledge-sharing) the same capabilities and knowledge as the superior firm
of the two merging firms.
The second scenario is a two-way diffusion of know-how. This means that both
companies can enhance their knowledge and technology as a result from a merger. In this
scenario, none of the firms have the superior knowledge on all areas, which means that
both companies will share their knowledge, as well as getting taught something new from
the partner company.
Either way, the idea is that the merged firm will adopt the best aspects of both firms,
resulting in one big and very efficient firm.
!

3.2!Non@profit!maximizing!motives.!!
There are other motives for horizontal-mergers, which is not about profit maximization.
This may be due to different the goals for managers and shareholders etc. This sub section
will discuss the following non-profit maximizing motives:

3.2.1 Growth maximization

3.2.2 Market for corporate control
3.2.3 The Failing firm hypothesis
!

3.2.1!Growth!maximization!
Given the assumption of a divorce of ownership from control, which means that the
manager of the firm is not the owner, it has been argued that the managers may pursue
different goals than what is optimal for the shareholders. The growth maximization theory

Page 18 of 50!
(Marris, 1964), suggest that managers might want to grow the firm at the expense of
maximizing future profits. The reason for this is that in Marris´s model, the manager’s
salaries and status depends on the size of the company or department. By merging, and
hence increase the activities under their control, the managers will enhance their status
and reputation. This is why managers may strive for growth rather than maximizing
profits.
Internal growth may take a long time to pursue, and horizontal mergers may in some
cases be the perfect opportunity for managers to achieve external growth quick.

3.2.2!Market!for!corporate!control!
In an efficient capital market, managers who act against the interest of shareholders, and
incompetent managers should be removed (Manne, 1965). If a company is
underperforming, the market value of the given company will fall. This may attract the
attention of potential buyers that thinks that they can use company´s assets more efficient.
This will however require that the potential acquirer get access to information about the
targeted firm in order to identify possible sources of slack. It also requires that the
acquirer is able to buy the shares to a price below post-merger value. The current owner
of the targeted company might resist selling if they believe that the share-price will
increase in the future. Another problem might be that the underperforming managers may
have developed something called poison pills strategies, which is done to make the firm
less attractive or confuse a takeover. These strategies might include increasing the
company debt or giving generous stock options to employees that are cancelled if an
acquisition takes place.
!

3.2.3!The!failing!firm!hypothesis.!!
Another motive for horizontal merger is the failing firm hypothesis which is based on that
a merger may be viewed as a civilized alternative to bankruptcy (Dewey, 1961). This
means that instead of letting an inefficient company that are heading for bankruptcy die
slowly, another firm might be able to transfer the assets of the failing firm to its
successful firm, and hence gain something, instead of letting the company “disappear”
into bankruptcy. According to this hypothesis, more mergers should occur during
recession when there are more failing firms. One example is the Wells Fargo and
Wachovia merger, which was a federal effort to prevent Wachovia from failing (The Wall
Street Journal, 2008).
!

Page 19 of 50!
 Chapter!4:!Potential!downsides!and!risks!related!to!mergers!

To%pursue%a%merger%is%not%free%of%risk.%This%chapter%will%discuss%some%
possible%risks%and%downsides%to%merging%

!
To pursue a horizontal merger does not only bring upsides to the merger company. A
merger carries no guarantee of fulfilling ROI1 expectations, and may involve big risks and
uncertainties in terms of high merger costs and efficiency losses. The following potential
downsides will be discussed:
4.1 Dis-economies of scale
4.2 Merger costs
4.3 Output flexibility
!

4.1!Dis@economies!of!scale!
As discussed earlier in this paper, a merger might lead to lower costs due to efficiency
gains resulting from increased scale of production. However, when the scale of the
business is increased too much, it is possible that one will experience the opposite effect,
i.e. efficiency losses resulting from increased scale. Referring back to Figure 3 –
economies of scale, the diseconomies of scale is represented by point C. From figure 3
one can see that by increasing the output (Q), the company will lower its cost per unit.
However, this is only true until it reaches Q1. Producing a quantity larger than Q1 will
increase the cost again. When the scale of a company becomes to large, efficiency losses
may occur as a result of managerial diseconomies, which is one of the most widely cited
explanations for diseconomies of scale (Lipczynski, Wilson & Goddard, 2013). Sources
of managerial diseconomies include the following problems:
• Less efficient communication between different tiers of management, or between
different parts of the organization generally.
• Complex organizational structures.
• Bigger companies may lead to low moral among employees, who feels less
involvement or interest in the company´s performance.
• More complex relationships between the workforce and management, or different
groups of workers

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1!Return!on!Investments!

Page 20 of 50!
From the points above, one can understand that increasing scale of a company brings
challenges to the merged firm. How well the integrated company is able to keep a good
communication and information flow is not easy to forecast, and depends from case to
case.
!

4.2!Merger!costs.!
A merger may come with great risks in terms of high costs related to it. A newly
integrated company will in many cases have to do some restructuring and reorganization,
which demands a lot of recourses. Also, as discussed in sub section 3.1.6, the two
independent companies may posses’ different qualities, and the diffusion of know-how
requires a lot of resources to be spent on employee training.
By combining operations, the operational synergies may lower the cost, however, “the
potential advantages have to be weighted against the cost of combining or transferring
assets” (Trautwein 1990).
A common merger scenario consists of one Acquirer and one Target Company. In such a
scenario, the Acquirer buys the Target company for a given price. The real value of the
Target company may be hard to estimate, and the Acquirer hence faces the risk of paying
too much.

4.3!Output!flexibility!
Smaller firm may be able to be more flexible in regards to output (Fiegenbaum & Karnani
1991). According to this theory, there exist a trade off between output flexibility and firm
size. This is also found to be a viable source of competitive advantage, especially in
industries with stronger demand fluctuations. This means that a merged company may
loose some competitive advantage in terms of output flexibility caused by their increased
firm size.
!
!
!
!
!
!
!
!
!
!
!

Page 21 of 50!
 Chapter!5:!US!Banking!Industry!Research!

This%chapter%is%an%empirical%analysis%of%the%US%banking%industry,%and%
how%the%merging%banks%have%performed%compared%to%non:merging%
firms%

5.1!Introduction!
According to research published by Federal Reserve (Adams, 2012), the number of
institutions in the US banking industry has declined a lot since 1980, and the assets
controlled by the largest institutions have increased significant as well. In 1980, the 10
largest institutions controlled 13,5% of the banking assets, however, in 2010 the 10
largest institutions controlled approximately 50% of the banking assets. At the same time,
the number of banks operating in the US went from more than 19 000 banks to
approximately 7 000 banks. In other words, the US banking industry seems to be more
and more concentrated. The Riegle-Neal interstate Banking and Branching Efficiency Act
of 1994, which allowed branch banking beyond one state and throughout the United
States, and the Gramm-Leach-Bililey Act of 1999 (Financial Services Modernization
Act), which allowed banks to enter other financial markets and provide additional
financial services, are both mentioned by Adams (2012) as potential causes for the
increase in banking mergers, which again led to higher concentration in the industry.

The financial crisis of 2007 caused a lot of bank failures and mergers, which again
contributed to an even more concentrated industry (Appendix 1; Wheelock, 2011).
According to Adams´(2012) research, 2007 and 2008 did not lead to any increase in the
number of mergers compared to other years, in fact, 2008 was one of the years with the
smallest number of mergers during the period. However, he found that 2008 was
dominated by the biggest mergers, and the average assets of the Target firm were 7
Billion $.
!

Page 22 of 50!
 Average!Assets!of!Target!banks!
!8000!000!!
!7000!000!!
!6000!000!!
Dollar!in!1000!

!5000!000!!
!4000!000!!
!3000!000!! Average!Assets!of!Target!
banks!
!2000!000!!
!1000!000!!
!S!!!!

Year!
!
Figure!4!E!Source:!Adams!(2012)!

In this empirical part, there will be used data to look at 3 efficiency variables that might
differ for banks that participated in a substantial merger during this time period, versus
banks that did not participate in such merger.

Chapter 5 will in the next sub chapter do a brief literature review on previous work on
horizontal mergers. Following, the methodology will be discussed and explained, going
through the data collection, calculations and estimations. Thereafter, I will explain which
assumptions and limitations the research will depend on before presenting my findings.
Finally, there will be a conclusion and discussion part.
!

5.2!Literature!review.!
Research has been done on the merger topic by testing various factors such as price
effects (Prager & Hannan 1998; Borenstein 1990; Weinberg 2007) and efficiency effects
(Peristani 1997, McGuckin & Nguyen, 1995; Ravencraft & Scherer, 1987).
Prager & Hannan (1998) found that banking mergers lead to a significant price effects for
two of the three account types that were tested. Based on their research, they were able to
conclude that the price increase was caused by increased market power, rather than
decreased efficiency for the merged banks.

Research has also been done aimed to examine whether mergers are motivated by
increased market power, cost-savings or other managerial aims such as growth
maximization (Gugler, Mueller, Yurtoglu & Zulehner, 2003). The conclusion from this

Page 23 of 50!
study was that profits tend to increase, and sales tend to decrease which is consistent with
the market power hypothesis.
Stock market prices has also been used as an alternative approach to study the
performance of merged firms (Bradley, Desai and Kim, 1988; Jarrell, Brickley and Netter,
1988).
A study on banking merger efficiency was conducted by Berger & Humphrey (1992).
They found that larger banks do not have lower average costs than middle-sized banks
and that banks do not experience economies of scale, as they grow larger. They further
found that there is only limited potential for economies of scope as a result of banking
mergers. Berger and Humphrey hence reject some of the merger-motives mentioned
earlier in this thesis.

Other studies on the banking industry have been done such as Pilloff (2004), which
studies mergers between 1994-2003 and Wheelock (2011) that analyzes mergers that
occurred between 2007-2010. Wheelock found that the number of banks declined by
about 12% between 2006-2010. He also found that deposit concentration increased,
meaning that the largest banks held more of the deposits made by consumers.
One of the most interesting researches in relation to this thesis is Peristani (1997), which
did research on the efficiency in relation to banking mergers that took place during 1980s
and 1990s. The research did not find any improvements in X-efficiency following a
merger, but moderate improvements in scale-efficiency and profitability was found.
!

5.3!Hypotheses!
The empirical part of this thesis will look at various efficiency variables, to investigate
whether there are any efficiency gains or losses related to a banking merger. There are
chosen 3 variables that will be analyzed, and hence there are chosen 3 hypotheses for the
analysis.

The first variable that is going to be analyzed is the cost to income ratio (from now on
referred to as CIR). The CIR is calculated by taking the operating expenses of a company
and divide it by operating income. This variable is commonly used in the financial sector
to measure how costs are changing compared to income. Since we are looking at mergers,
it is useful to look at this variable because CIR shows the efficiency of a company in
minimizing costs while increasing profits.
As discussed earlier in this thesis, a merger may lead to cost-savings for the merged firm,
and the hypothesis will hence be based on these potential efficiency gains:

Page 24 of 50!
Hypothesis 1: Merger banks will achieve higher cost-efficiency compared to the control
group

Second, the return on assets (from now on called ROA) will be analyzed to look at what
earnings were generated from invested capital. When two equally sized companies merge,
the newly integrated company will have approximately double assets to work with. The
ROA measures how efficiently the integrated company can manage its assets. Since most
mergers aims to increase the profitability of the company, one may expect increased
efficiency of assets management following a merger.

Hypothesis 2: Merged firms will achieve more efficient assets management

The last variable that will be analyzed is profit per employee, from now on referred to as
PPE. The reason for the choice of this variable is that a merged firm might have the
opportunity to do just as well with fewer employees. For example, the merged firm might
not need a doubled HR-staff, even though the company doubles in size.
Lowell Bryan (2007), a director at McKinsey, states that profit per employee is a “pretty
good proxy for the return on intangibles”.
How the employees react to a merger is also not given. Employees of merging firms have
stated that: The job had become bigger and brought more work; more scope, insight and
variety; more status, responsibility and promotion prospects and the work became more
challenging (Graves 1975), indicating that employees might be more motivated, because a
merged firm might increase the perceived opportunities in the company, which again
encourage the employees to work harder for promotions etc. which eventually may result
in increased profits for the firm.
On the other hand, a merger might lead to decreased loyalty towards the newly integrated
company, which again leads to decreased efficiency.
It is in this paper assumed that an increase in PPE, is equivalent to increased employee
efficiency, and vice versa.

Hypothesis 3: Mergers lead to higher efficiency among employees.

!
!
!
!
!
!
!

Page 25 of 50!
5.4!Methodology!
I will in this sub chapter discuss my choice of research method. The sub chapter also
includes a discussion about my data and data collection, its validity and reliability. Finally
an explanation about how I calculated and estimated the variables will be presented and
discussed.

5.4.1!Research!method!
The research method has been developed by using “the research onion” model (Saunders,
Lewis & Thornhill, 2011). The model consists of 5 layers; Research philosophy,
Methodical choice, Strategy, Time horizon and Techniques and procedures.

The research philosophy is based on positivism which was introduced by August Comte
(1898 – 1857). Positivism is based on the assumption that “only legitimate knowledge can
be found from experience (Eriksson & Kovalainen, 2012). Hence, instead of developing
theories that predicts certain outcomes, positivism is more about observing, and do
empirical research to look at what actually happens in real life. Positivism is a well fitting
research philosophy when testing hypotheses.
The research will use quantitative data for the research. The data is collected from a
database, and hence I have chosen to use secondary data instead of primary data. Primary
data means that the researcher collects the data directly from the companies. Secondary
data on the other hand, means that I have collected the data through a different source
than the company itself. This is very common in quantitative research when the research
requires a lot of data. The research will collect data solely from a database, and hence no
quantitative or qualitative surveys will be used to obtain additional information from
companies in the sample. The methodical choice for this research is hence “Mono method
quantitative”.
I will use case study to answer my research question. As my research aims to generalize
two groups of companies, and compare them, I will need multiple observations for the
research. This corresponds to a multiple case study (Yin 2002). Yin (2002) has stated that
a case study should have a clearly defined start and end period, which in my case is 2004
to 2013. The case study will make use of planned deduction, which means that it has pre-
defined variables that are tested. The advantage with deductions is that the study becomes
less abstract, and more specific, and is well suited when testing hypothesis. On the other
hand, deductions prevent the research from studying the case in every detail because the
researcher already has decided some pre-defined variables to look into. This is why one
may say that deductive research is somewhat restricted in nature (Stoecker 1991).
The time horizon is as mentioned a 10-year period. There are mainly two choices for time
horizon; Cross-sectional design or longitudinal design. Cross-sectional designs are

Page 26 of 50!
commonly used in case studies, and have a relatively short time period, and is a
“snapshot” taken at a particular time (Saunders, Lewis & Thornhill, 2009).
A longitudinal design on the other hand is well suited when studying change and
development over time. A longitudinal design may be used, even though the research has
a time constraint.
As a short summary of this section, my research is a longitudinal case study based on a
positivistic philosophy, with a mono method quantitative data collection.
!

5.4.2!Data!collection!
The research will use collected data to analyze the differences between banks
participating in a substantial merger, and banks that did not participated in such mergers
during 2007-2008.
There are many ways of defining a substantial merger. The definition introduced by
Prager and Hannan (1998), is based on the Herfindahl-Hirschman Index (HHI). They
categorized a merger that increased the HHI of more than 200, to a total level of 1800 as
substantial, which is consistent with the US Department of Justice merger guidelines
(1995), stating that such mergers may be subject to scrutiny.
To use these HHI numbers to define a substantial merger would be the most preferable
way, as one basically uses the law to define it. However, this approach seems a bit
complex for this thesis, considering both, data availability and time available. Therefore
this paper uses its own definition of a substantial merger:
A substantial merger is defined by a merger where the Target company was at least 75%
as big as the Acquirer company in terms of employees and revenue. This means that the
Target company had at least 75% as big staff and revenue the year before the merger.

There is collected data from a total of 18 banks in the United States. Eight of them
participated in a substantial merger, turning into four banks, and the other ten banks are
used as a control group. Both samples consist of the largest banks in the US. The merger
group consists of todays Wells Fargo, The bank of New York Mellon, TD Bank NA and
PNC Financial Services. The control group includes banks such as Citigroup, HSBC Bank
USA and SunTrust Bank.
The data is collected from Orbis – Bureau van Dijk, a financial database containing
information about more than 140 million companies worldwide. The database offers
financial information for a 10-year period starting from the last available date. Orbis is
recognized by many universities, including Aarhus University, which indicates that the
database is seen as a credible source of information.

Page 27 of 50!
5.4.3!Reliability!and!Validity!
Saunders, Lewis & Thornhill (2009) suggests that when deciding which type of data that
is needed for the research, there are mainly 3 things I must consider:
• The data will enable me to answer my research question and to meet my
objectives;
• The benefits associated with their use will be greater than the costs;
• I will be allowed access to the data

Stewart & Kamins (1993) argue that secondary data gives the researcher an advantage,
because one is able to evaluate the data prior to the research. This is because the data
already exists, opposite to primary data researches where the researcher must spend a
considerable amount on time collecting the data, and then evaluate them.
!
Validity!
When conducting research, it is important to measure the validity of the data. This means
that one should evaluate whether the data used in the research actually provides the
information needed to answer the research question.
My research uses 3 different data’s to measure efficiency. The basic assumption behind
my choice of data is that there is a significant relationship between profitability and
efficiency. As efficiency is about doing something as good and cheap as possible with a
minimum waste of time and effort, or defined from an economic point of view; to use the
lowest amount of input, for the greatest amount of output, it is reasonable to use
profitability measures as an efficiency indicator.
When arguing for that profitability measures is a suitable measure for efficiency, it should
also be highlighted that the banking industry is a for-profit industry, and hence it is
obvious to assume that the banks are profit-maximizing firms.
!
Reliability!
It is also important for researchers to evaluate the data source used in the research.
Finding information from random websites may ruin the credibility of the research, and
the probability of collecting wrong information is relatively high. Saunders, Phillip &
Thornhill (2009) suggest that data from large, well known organizations are likely to be
trustworthy. In my research, all data is collected from the Orbis database, which contains
financial information for over 140 million companies worldwide. The database is
commercialized, which means that the database is a product, and can be made accessible
by paying for access. As a student at Aarhus University, I have access through my student
ID and password through the university´s deal with the company. Considering the fact

Page 28 of 50!
that the university provides access to the database, it can be assumed that the database
contains credible information.
!

5.4.4!Estimation!and!calculation!
To conduct the research, and be able to present the findings in a clear and understandable
way, some calculations and estimations were necessary. The first two variables CIR and
ROA were calculated by Orbis as a key figure for the banking industry. The CIR was as
mentioned calculated by taking operating expenses and divide it by operating income.
For the ROA, it was chosen to use pre-tax numbers in the calculation. The ROA was
calculated by taking the profit before tax and divide it by average total assets. It was done
by using the following formula:
!
!"#$%&!!"#$%"!!"#
!"# = !
!""#$"!!"!!"#$"!!"!!"#$ + !""#$"!!"!!"#!!"!!"#$
( 2 )
!
The PPE variable was calculated by taking the companies profits before tax, and divide it
on the number of employees. The reason for the choice of pre-tax calculations was to
avoid any tax differences etc. between the companies. Since this variable aims to look at
how much money the company makes per employee, looking at pre-tax profits seemed
most accurate in terms of the purpose of this variable.

After calculating the variables, some further estimation was necessary to make the
numbers presentable and comparable. The main challenge here was to compare the pre-
merger numbers. To explain the process in an understandable way, the companies
participating in a merger will be referred to as company X and Y. Hence Company X and
company Y integrates into company XY.
The PPE was calculated by adding together company X and Y´s profits, giving a total
profit for X and Y. The same was done with employees, giving a total number of
employees. Then, the total profits of X and Y were divided by the total number
employees, giving us the average profit per employee for X and Y.
For the CIR and ROA variable, there was used a different method for estimation. The
reason for this is that the companies X and Y are different in size. When calculating PPE,
this is not a problem because one simply wants to find the profit per employee, which
allow us to simplify the estimation explained above. However, The CIR and ROA are
based on the whole organization, and not just per employees. This means that one have to
weigh the variables differently. This is done by first calculating the company-size ratio.
The company size ratio is in this paper calculated in terms of revenue. It is done by taking

Page 29 of 50!
company X´s revenue before the merger, and divide it by the total revenue of X and Y.
Lets take the Wells Fargo and Wachovia merger as an example: In 2004 (first observation
year), Wells Fargo had an operating revenue of 32 949 million $, and Wachovia had an
operating revenue of 22 740 million $. The combined revenue of the two companies was
hence 55 689 million $. The company size ratio is hence calculated by the following
formula:
32949
Wells!Fargo = = 0,59
55689

Wachovia was therefore 1-0,59= 0,41.

It should be noted that I have experimented by using number of employees for the
calculation of company size ratio as well, to test if this led to any significant ratio
differences. I found that it did not matter much whether using revenue or number of
employees.

Now, when knowing the company size ratio, one can use it to weigh for CIR and ROA
calculations. The CIR for Wells Fargo and Wachovia was in 2004 58,46 and 62,54
respectively. Their common CIR was hence calculated as follows: 58,46 ∗ 0,59 +
62,54 ∗ 0,41 = 60,13
The reason why we need to estimate the common CIR and ROA pre-merger is to be able
to compare the development in graphs, hence illustrating the variables as if the company
was integrated, however with no potential merger gains present.
Finally, after all variables are calculated for each company in each year, an average for
the merger sample, as well as an average for the control sample is calculated for each year
to compare the two samples over a 10 year period.
!

5.5!Assumptions!and!Limitations!

5.5.1!Assumptions!!
The following assumptions is made to conduct this research:

1. Profit maximization is assumed to be the main motive for the mergers used in the
research sample. This means that all companies involved in this thesis samples
aims to achieve as high profit as possible, and that the mergers are done to further
increase profits. This makes it easier to evaluate if a merger has been successful or
not. The assumption is made to make clear that all firms involved are aiming for
the same goal.

Page 30 of 50!
 2. Accurate and similar financial reporting. What is behind the actual numbers in
financial reports are often hard to understand. All firms used in the sample are
assumed to have correct and similar financial reporting, and hence exclude any
possibilities that there exist differences in financial performance caused by the
financial reporting alone.
3. Cost-to income ratio is assumed to be equivalent to cost efficiency, and hence a
change in CIR means a change in cost efficiency.
4. Return on assets is assumed to be a suitable measurement of how efficient a
company is able to manage its assets. It is hence assumed that a change in ROA is
equal to a change in the efficiency of asset management.
5. Profit per employee is assumed to be a suitable measurement of employee
efficiency. The assumption is based on that the scale of return that is realized from
an employee is equivalent to how efficient the employee operates.
6. It is assumed that the mergers were executed the same year as they were officially
registered.
!

5.5.2!Limitations!
The study is limited to some extent due to various reasons such as time available for the
project as well as recourses available. The research has the following limitations:

1. The number of observations. The number of observations is few, and it would be

preferable to collect more observations to make the analysis more credible and
precise. By collecting a bigger sample, one would increase the probability of
correct findings, and the probability of coincidences and wrong findings would be
lower.
2. Further, the research will be limited to a describing technique, instead of a
statistical test. The reason for this comes as part of the first limitation; the sample
size. The sample size is too small to perform any convincing statistical tests
including coefficients and significant levels. The empirical analysis will therefore
be focused on describing the development between the merger group and control
group, giving a simplified understanding of the development.
3. Deduction. As mentioned earlier, the study has chosen planned deductions,
meaning that I made 3 pre-defined variables before conducting the research. This
means that my study is limited to the 3 variables and does not allow for additional
findings.
!

Page 31 of 50!
5.6!Findings.!
In this section, the findings for each variable will be presented and discussed divided into
sub sections. The sub sections will contain a small conclusion for each variable.
To provide a clear and good structured analysis, it will be split into three parts:
1. Pre-merger analysis
2. Time of mergers analysis
3. Post-merger analysis

The Time of merger period is highlighted in grey for all the main graphs to make it easier
to distinguish the three time periods.
!
Before discussing the findings, I will have a look at the correlation among the variables,
to get an impression of what we can expects in terms of similarity.

Merger!group! PPE! ROA! CIR!

PPE! !! 0,88! 10,41!
ROA! 0,88! !! 10,73!
CIR! 10,41! 10,73! !!
!! !! !! !!
Control!group! PPE! ROA! CIR!
PPE! !! 0,95! 10,45!
ROA! 0,95! !! 10,47!
CIR! 10,45! 10,47! !!
Table!1!E!Correlation!between!variables!

The table shows that we can expect high correlation between PPE and ROA, which seems
to be extremely correlated at 0,95 for the control group and 0,88 for the merger group.
The CIR on the other hand seems to be less correlated with the two variables.

With the correlations in mind, the three hypotheses will now be discussed separately.
!

5.6.1!Hypothesis!1:!!
“Merger!banks!will!achieve!higher!cost1efficiency!compared!to!the!control!group”!
!
Hypothesis 1 will be analyzed by comparing how the costs are changing compared to
income. This makes it possible to analyze how the cost efficiency for merging firms have
developed compared to non-merging firms during the 10-year period. It is important to
remember that since CIR is a combination of both costs and income, there are 3 main

Page 32 of 50!
reasons for why the CIR is changing: (1) change in income, but same costs, (2) same
income, but changed costs and (3) a combination of (1) and (2). This means that one
cannot simply, based on the analysis of Figure 5 conclude that one group experienced
increased or decreased costs compared to the other group. Therefore, further investigation
will be done to get a more clear answer to why the CIR developed as it did. The CIR will
however be interpreted as a cost-efficiency measure, and an increase in CIR will hence be
interpreted as decreased cost-efficiency.
!

90!

80!

70!

60!
CIR!(%)!

50!
.!
40!
Merger!group!
30!
Control!Group!
20!

10!

0!
2004! 2005! 2006! 2007! 2008! 2009! 2010! 2011! 2012! 2013!
Year!
!
Figure!5!E!CostEtoEIncome!Ratio!

!
Pre@merger!analysis!
The pre-merger analysis will analyze the time period between 2004 and 2006. In other
words, there will be analyzed how the cost-efficiency of the groups developed the years
before the mergers. As seen from the graph, both groups started at the same point in the
beginning of the period, with a CIR of 62,5%. After 2004 however, one can see that the
merging firms experienced an increase in CIR the following years, indicating that the
Merger group became less cost efficient during the years before the “time of mergers”.
The decreased cost efficiency might be interpreted as one of the reasons why the banks
ended up merging. This can be explained by two points enlightened earlier in this thesis;
Market for corporate control and The failing firm hypothesis. Assuming that the market
perceived the Target banks as underperforming organizations, the stock price for these
banks is likely to decrease, attracting the attention of potential buyers. To investigate if
the concept of market for corporate control is a suitable interpretation, further analysis!
must be done to look at the costs for the Target companies only. As mentioned in chapter

Page 33 of 50!
5.4.4 about estimations, the pre-merger CIR is a weighted estimation based on both
Targets and Acquirers. Looking at the costs only for Targets (Appendix 2) they show a
CIR of 73%, against 64% for the control group. It is hard to conclude on whether this is a
significant difference or not, however, considering the big revenues and costs associated
with such big banks, the differences corresponds to a great value in terms of money, and it
is reasonable to point out that the lower cost-efficiency among the Target banks may have
been a trigger for the mergers that happened the next years.

Because banks are very sensitive to recession, the failing firm hypothesis is also an
important point to discuss as a possible reason for why the mergers happened. According
to research done by Altunbas, Manganelli & Marques-Ibanez (2012), 82% of the banks
market value in EU and US disappeared between 2007 and 2009, which corresponds to
more than 3 trillion euros. If the Target banks were threatened by bankruptcy, the failing
firm hypothesis might have been a trigger for some of the mergers. However, this is a
somewhat weak interpretation because there are no specific reasons to believe that the
Target banks were failing. What I have found is that the cost-efficiency for the Target
groups seems to be lower than for the control group, however this does not mean that the
companies were failing.
Looking at the standard deviation (Appendix 3) the premerger period is characterized by
relatively low STD´s for both groups, which means that my data is concentrated around
the mean, and the premerger data seems fairly reliable.
!
Time!of!mergers!analysis!
The “Time of Merger” analysis will analyze how the cost developed during the two
merger years, 2007 and 2008. I find that the differences between the two groups remained
the same in 2007 compared to the year before. However, in 2008 a noteworthy
observation is seen from the control group. As the merger group stays at about the same
CIR level as before, the control group experienced a substantial increase. The control
group experienced an average increase in CIR of 14 percentage points, going from 64% in
2007 to 78% in 2008. These findings are not easy to explain, however one possible
interpretation can be made as an attempt to explain the differences.
Assuming that both groups experienced a decrease in revenue as a result of the financial
crisis, it was necessary for the banks to cut costs to be able to keep CIR at the same level.
The findings of 2008 may be explained by instant cost-cuts for the merging firms such as
mass layoffs as a result of horizontal mergers (Gianaris N.V., 1996), or other cost-savings
realized immediately after the mergers. Cost-savings through employee layoffs is
reasonable to discuss because when merging, the newly integrated bank will have two of
everything such as two HR departments, analyst departments etc. which might make it
easier for the integrated banks to get rid of extensive employees quick. As mentioned

Page 34 of 50!
earlier, the CIR of the merging group is more or less constant, and the cost-saving
interpretation is based on the assumption that operating income decreased for both
groups, but only the merger group managed to lower costs at the same rate.

So far, this variable has been researched by looking at a combined cost in relation to
income variable. The basic assumption for the interpretation of cost cuts for the merged
firm is that costs actually decreases for the merging firms. As discussed earlier, it might
as well be that the merging firms’ only experiences constant revenue, and no cost cuts at
all.
To extend this research, and to get a more clear answer on what changes the two groups
actually experienced, I will look at the two groups costs and income, to determine
whether the previously explained options (1), (2) or (3) is most accurate.
To do this, a graph is made to illustrate the development. The graph starts at 0 in 2005,
and shows the accumulated growth in revenue and costs growth for both groups.
!

60!%!

50!%!
Accumulated!Growth!

40!%! Merger!Group!Revenue!
(Avg)!
Merger!Group!Costs!
30!%!
(Avg)!
!Control!Group!Revenue!
20!%!
(avg)!!
Control!Group!Cost!(Avg)!
10!%!

0!%!
2005!2006!2007!2008!2009!2010!2011!2012!2013!
Year!
!
Figure!6!E!Cost!and!Income!Development!

!
Starting by looking at the significant CIR differences between the two groups in 2008, I
find that the control group, which is represented by dashed lines, experienced a relatively
large increase in costs and a small decrease in income from the year before. The
combination of increased costs and decreased income will off course have a big impact on
the CIR variable. The Merger group on the other hand experienced a stable growth in both
income and costs throughout the whole period, which is the reason for why the CIR was

Page 35 of 50!
constant. These findings indicates that my previous attempt on explaining the CIR
differences is wrong, and cost-savings does not seem to occur for the merging banks.
Looking at the STD for the time of merger period, I find that the significant CIR increase
for the control group in 2008 is characterized by a large standard deviation, indicating that
the data is more spread, and that outliers may be the reason for this “abnormal” increase.
This means that the 2008 data is less reliable, and the increase might not be a
representative finding for the group.
!
Post@merger!analysis!
In 2009 the control group experienced an opposite effect of 2008, meaning that they
managed to lower costs, and increase income. This was the reason for why CIR went back
to the same level as the merging group in 2009. One rather surprisingly observation is that
the CIR post-merger shows no differences in terms of cost-efficiency between the two
groups. This is noteworthy because one might expect higher cost-efficiency for the
merger group caused by one or several efficiency motives mentioned earlier in this thesis.
The STD for the post-merger period seems to be similar to the post-merger period for
both groups, which means that the STD is fairly low. This means that the post-merger
data seems to be reliable, and hence the findings are representative for the respective
groups.
!
Sub!conclusion!!
In the pre-merger analysis I found that the cost-efficiency of the merging firms
experienced a moderate decline towards 2007. Further analysis of the Target banks found
that they were more than 8% less cost efficient than the control group. From these
findings it was suggested that the concept of market for corporate control was one
possible explanation for why the mergers happened in the first place.
At the time of the mergers the control group experienced a surging CIR, while the
merging firms were able to keep it steady. I here suggest that a possible explanation for
this phenomenon is that the merging firms might found it easier to get rid of extensive
employees, and hence lower their costs. This interpretation was rejected when analyzing
the individual cost and income development, showing that the merging group had a steady
increase in both income and costs, which indicates that the merging firms experienced no
significant cost-savings. The big CIR increase for the control group in 2008 was found to
be caused by increased costs, as well as decreased revenue.
After 2008 the non-merging firm was able to lower their CIR to the same level as the
merging firms, and stayed at about the same level through the rest of the period.

Page 36 of 50!
I also found that the data in the pre-and post-merger period had fairly low standard
deviation, while the STD in 2008 was high, indicating that the data for the “time of
merger” period is less reliable than the two other periods.
The overall conclusion is that there does not seem to be significant differences between
the two groups after merging and this hypothesis is rejected.
!

5.6.2!Hypothesis!2:!!
“Merged!firms!will!achieve!more!efficient!assets!management”!
!
This hypothesis will be analyzed by looking at how the ROA has changed during the time
period. Figure 7 show that the two groups follow the same trends, with a relatively high
correlation of 0,83.
!

3!

2,5!

2!
ROA!(%)!

1,5! .!
Merger!group!
1!
Control!group!
0,5!

0!
2004! 2005! 2006! 2007! 2008! 2009! 2010! 2011! 2012! 2013!
S0,5!
Year!
!
Figure!7!E!Return!on!Assets!

!
Pre@merger!analysis!
There does not seem to be any significant differences between the two groups during the
pre-merger period, showing higher ROA for the merger group in 2004, and higher ROA
for the control group in 2005. In 2006 however, a moderate increase for the merger group
is found. When looking at the Targets and Acquirers separately (Appendix 4), I find that
it is only the Acquirer group that contributes to this increase, having an average ROA of
more than 3%, which is 1 and 0,8 percentage points more than the target group and the
control group respectively. The Target group seems to be less efficient than the control
group in managing assets (however not significant), and might be used as an (weak)

Page 37 of 50!
argument for my previous interpretation that market for corporate control may be one
possible explanation for why the mergers happened the years after.

I find that the pre-merger period in general has a bit high STD (Appendix 5) for both
groups. The increase for the Merger group in 2006 shows even higher STD, meaning that
the data is less reliable, and the increase might be caused by outliers; hence the increase
might not be representative for the whole group.
!
Time!of!merger!analysis!
During the merger years, both groups experienced a significant decline in ROA, which is
not unexpected considering the financial crisis. However, the two groups do not seem to
react simultaneously. In 2007, the Merger group experienced an average ROA decline of
around 55% (1,4 percentage points) compared to 2006, while the control group on the
other hand only experienced a 5% decline (0,12 percentage points).
The differences in percentage points might not seem radical, but considering that banks
are highly leveraged and controls a lot of assets, every per mille percentage is of value to
the banks2.
In 2008 however, the control group experienced a significant decline in ROA compared to
the Merger group. Despite the substantial ROA decline for the control group, they still
managed to achieve about 50% higher ROA than the Merger group in 2008.

The data for the control group seems to be very unreliable showing high standard
deviation for both years, while the Merger group shows rather small standard deviations.
!
Post@merger!analysis!
The post-merger period shows an interesting observation. As seen from the graph, the
decline in ROA slows down for the merger group, declining only 0,07 percentage points
in 2009. The decline in ROA for the control group however, continues more or less with
the same rate, going from an average ROA of 0,67% in 2008, to -0,26% in 2009. Even
though the mergers seems to have a positive effect on the ROA in the beginning of the
post-merger period, the control group quickly catches up with the merging firms, and the
pre-merger period is generally characterized by equal ROA for the two groups.
The differences in ROA the two years after the mergers might be due to efficiency gains
associated with the mergers, or increased profitability due to increased market power and
hence increased prices following a banking merger. Whether or not the higher ROA for
merging firms is due to increased market power relies on the assumption that the merging
firms operated in the same local markets pre-merger
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2!Wells!Fargo!for!example!controlled!assets!worth!1!690!billion!dollars!in!2014!

Page 38 of 50!
When it comes to efficiency gains in terms of cost savings, this interpretation has been
found earlier to be wrong, as I found that there does not seem to be any cost-savings for
the merging banks. I also found that there were no significant differences in CIR for the
two groups post-merger, indicating no increased cost-efficiency. An alternative
explanation for the differences may be the concept of “diffusion of know-how” explained
earlier as one motive for horizontal mergers. Since banking is a service industry highly
dependent on good people, the enhanced knowledge that may be achieved when
integrating two companies may have been an important contributor to the merging firms
higher ROA during the two years after the mergers. Since one of the banks main tasks is
to invest its capital, the increased knowledge about risk, uncertainties and possibilities
may have led the merger banks to obtain a higher return during the two years after the
merger.
One should however note that both groups shows very high STD in 2009. The STD is
also high the rest of the period. The reliability of the data is hence weak, and how big the
differences actually are between the two groups in 2009 and 2010 are not easy to
conclude on.
!
Sub!Conclusion!
The pre-merger analysis showed similar ROA for the two groups, except for a significant
increase in the ROA for the merger group in 2006. Further investigation showed that it
was the Acquirer group that contributed to the significant increase, and that the Target
group showed less profitability among the three groups during the pre-merger period.
This supported my interpretation that the concept of market for corporate control may be
one reason why the mergers happened the coming years.
During the “time of merger” both groups experienced a decline in ROA, which is likely to
be caused by the financial crisis. However, it seemed like the merger group reacted one
year before the control group. On the other hand, the merger group was able to slow down
the decrease in ROA one year before the control group, achieving higher ROA than the
control group during 2009 and 2010. The reason for why the merger group achieved
higher ROA in 2009 and 2010 is ambiguous, however I suggested that the diffusion of
know-how might be an important contributor.
Overall, the development between the two groups is similar, with a relatively high
correlation of 0,83. The post-merger period only shows significant higher ROA for the
control group in 2009, while the rest of the period shows insignificant differences.
I further found that the data for this variable is characterized by high standard deviations,
especially for the years with most significant differences. This makes the differences less
interesting, and the actual differences during these years are a bit ambiguous.
Based on the overall effects, I reject the hypothesis that mergers lead to more efficient
asset management.

Page 39 of 50!
5.6.3!Hypothesis!3:!!
“Mergers!lead!to!higher!efficiency!among!employees”!
!
This analysis will look at how much money the banks make per employee, aiming to give
an idea of how much the employees are contributing in terms of value. Increased PPE
means that each employee contributes more, and is assumed to be the equivalent of
increased efficiency among employees, and vice versa.
!

!120!000!!

!100!000!!

!80!000!!

!60!000!!
Dollar!

.!
!40!000!!
Merger!group!
!20!000!! Control!group!
!S!!!!
2004!2005!2006!2007!2008!2009!2010!2011!2012!2013!
S20!000!!

S40!000!!
Year!
!
Figure!8!E!Profit!per!Employee!

!
Pre@merger!analysis!
The control group had an average PPE of 90 000$ in 2004, compared to 76 000$ for the
merger group. 2006 is characterized by a noticeable increase (high STD) in PPE for the
Merger group, compared to 2005, resulting in completely equal PPE for both groups. Also
this variable shows that it is the Acquirer group that contributes to the pre-merger
increase, and the target group shows also here to be the underperforming group
(Appendix 6).
!
Time!of!mergers!and!post!merger!analysis!
The development is about the same as what was found in the ROA analysis, and the
overall development shows a correlation of 0,88 for the test group and 0,95 (ref. Table 1)
for the control group between PPE and ROA. It is not unexpected that the two correlates,
and a high correlation is logic considering that both is a measure of profitability, however,
such a high correlation was somewhat unexpected. Despite the high correlation, the PPE
is higher for the merger group than for the control group in 2008, even though the

Page 40 of 50!
opposite is true for ROA. As the Merger group achieved a PPE of almost 25 000$ in
2008, the control group only achieved around 6 000$, while the ROA were 0,42% and
0,67% respectively.

As mentioned, the banking industry is a service industry, and highly dependent on good
people. When looking at possible contributors to the higher PPE for the merger group, it
makes sense to think about factors that might have increased their performance.
The “diffusion of know-how” suggested under the ROA analysis, seems as a reasonable
explanation for increased employee performance. It seems likely to assume that banks had
different ways of handling the financial crisis, and the exchange of experiences and
knowledge between the two newly incorporated companies might be an important
contributor for the differences in 2008 and 2009, and how the banks handled the financial
crisis. Also more motivated employees (Graves 1975) may have contributed to the
differences.
However, it is important to note that the higher profitability for the merger group is only
short term, and after 2009 the PPE for the two groups are surprisingly equal.
It is however important to note that the standard deviation for the Control group is
extremely high in most years after 2006 (Appendix 7).
!
Sub!Conclusion!
The PPE shows high correlation with the ROA, and the only main difference is that the
merger group achieved a relatively higher PPE in 2008, even though their ROA the same
year was lower. Increased employee motivation, as well as the previously suggested
knowledge and diffusion of know-how were discussed as possible reasons for the
differences in PPE during 2008-2009. Finally I found that there were no significant
differences in post-merger PPE, and that they in fact are surprisingly equal. Based on the
analysis the hypothesis about increased employee efficiency for merging firms is rejected.

5.7!Conclusion!
This sub chapter will conclude and discuss my empirical research, as well as
recommending further research on the topic.

5.7.1!Empirical!conclusion!
In this research I have tried to investigate the effects of mergers in the US banking
industry by analyzing the development of 3 predefined efficiency variables; Cost to
Income Ratio, Return on Assets and Profit per Employee. This was done by collecting
financial data from 4 mergers, and compare the data to a control group consisting of 10
non-merging banks over a 10 year period.

Page 41 of 50!
I found high correlation between ROA and PPE, while CIR generally was less correlated
with the two other variables.

The pre merger period was in general characterized by insignificant differences between
the two groups. When splitting the merger group into Targets and Acquirers I found that
the Target banks were likely to be the underperforming group, indicating that concepts
such as Market for corporate control might be an explanation for why the mergers took
place.
The time of merger period showed somewhat significant differences, generally showing
higher efficiency for the merger group. The reason for the relatively short-term
differences remains ambiguous, however, I suggested that one possible explanation is the
concept of “diffusion of know-how”.
Post-merger is the most essential period for analyzing if the mergers have led to any
efficiency gains or losses. According to theory, the merged firm might experience
efficiency gains such as economies of scale, purchasing economies etc. or efficiency
losses such as diseconomies of scale and high costs related to the mergers.
What I found however is that there does not seem to be any efficiency gains or losses, and
none of the variables shows significant differences between the Merger and Control
group.
I also discovered that those years characterized by abnormal increases or decreases in
efficiency were characterized by high standard deviations, which makes these findings
less reliable.
My overall conclusion is hence that the mergers in the US banking industry did not lead
to any significant efficiency gains or losses for the merging firms.
!

5.7.2!Further!discussion!and!considerations!
My research has both some strengths and weaknesses. The main strength of the research I
find to be the fact that it is very simple and understandable. By not using very
complicated models to evaluate merger effects, I think my research is also relevant to the
nonprofessional reader.
One weakness of the research is the interpretation of the variables. All the pre-defined
variables are assumed to tell something about efficiency. However, as they are all
profitability measures, they might get affected by the integrated companies abilities to
increase prices. This means that a finding of higher efficiency in my research might
actually be caused by increased market power, and not by efficiency increase. Another
weakness, which is mentioned earlier, is the small sample size of the research, which
makes my findings less representable. However, the research sample uses some of the
biggest mergers and banks in the US, which makes the sample interesting despite its size.

Page 42 of 50!
My findings are somewhat consistent with Berger & Humphrey (1992), which as
mentioned earlier in this thesis, rejected the hypothesis that larger banks are more
efficient than smaller banks, and that economies of scale is not realized when merging.
Peristani (1997) concludes however that scale-efficiency and cost savings are likely to be
realized following a banking merger, which is inconsistent with my findings. As
mentioned earlier, the Horizontal merger topic is overall inconclusive, and researchers are
not able to agree upon whether or not mergers results in increased efficiency. One main
reason for the inconclusive literature is probably the fact that mergers are very different.
There are no constant merger outcomes, and some mergers may be successful, while
others fail.
The high standard deviations found in my research also shows that the data varies a lot;
giving further evidence that one merger is very different from another.
There are a lot of factors that plays a role in how a merger turns out and researchers will
probably continue to disagree upon this topic for many years to come.

It should be considered that the real effects of these mergers remain unknown. This means
that it is impossible to know what would have happened if the mergers never took place.
Even though I did not find any efficiency gains for the merger group, does not necessarily
mean that the mergers were unsuccessful. It might for example be the case that the
mergers saved these companies, and that bankruptcy or significant profitability losses
would occur in a “merger free world”. How the variables would have developed with no
mergers taking place is impossible to predict, but it is worth taking into account when
reading my conclusion.
As a final remark, my choice of deduction has limited my study to my pre-defined
variables, and hence there might exist more clear relationships between efficiency and
mergers, beyond my variables.
!

5.7.3!Further!research.!
My research can be improved by collecting a bigger dataset. What I found while doing
my research is that it is very hard to gather a large sample of substantial mergers
happening in the same industry and market at the same time. There is however another,
perhaps better way of doing this research. If eliminating, or increasing the timeframe, one
can collect data from mergers happening over many years, and instead of doing analysis
based on actual years, one can simply analyze the changes over X years. Such research
may set time of merger as t=0, and analyze changes from e.g t=-5 to t=5 (10 year period),
and hence exclude the actual date. This will allow for a much bigger sample, and make
the data easier to obtain. It requires however that the Control group sample consist of

Page 43 of 50!
sufficient data from all relevant time periods to ensure that economic fluctuations are
accounted for.

This topic can be further investigated by including other variables, or go deeper into the
variables on a more micro level. My research is mostly based on superficial measures, and
the chosen variables depend on many factors. My CIR variable for instance, is a function
of costs and income. To investigate what types of costs that changes and how they
changed following a merger would be a good contribution, and extension of this thesis.
!
!

Chapter!6:!Conclusion!
!
Several merger motives have been determined, and were split into two categories; (1)
Profit-maximizing motives and (2) non-profit-maximizing motives. The profit-
maximizing motives discussed were potential efficiency gains that may be realized from a
merger. Such efficiency gains may be realized through Economies of scale, which may be
achieved through large-scale production, indivisibilities, specialized and learning
economies. Economies of scope may also be achieved by producing different output using
the same set of recourses. Thirdly, Rationalization may be achieved by shifting the
production from one plant to another. Avoiding Duplication of effort is another benefit,
which means that the two merged companies now can work together to develop new
technologies. Purchasing economies may also occur, which means that the bargaining
power of the newly integrated firm increases, because of its larger scale and increased
importance to the market. As a last benefit, the thesis discussed the concept of Enhanced
knowledge and technology. This is the idea of Diffusion of know-how, which is about
sharing knowledge and experience to increase efficiency, and hopefully achieve an
integrated company with the best characteristics from both participants.
The thesis also found three non-profit-maximizing motives. One of those motives is the
growth maximization theory, which concerns the problem when managers aim for fast
growth at the expense of maximizing profits. Another motive is the concept of Market for
corporate control, which is when the market perceives a company as underperforming,
and where the buyer thinks he can use the assets more efficient. The failing firm
hypothesis is another motive, which emphasizes that a merger may be the only way to
avoid bankruptcy.

The thesis also discussed potential downsides and risks related to mergers, and three
sources of risk were discussed. The first problem is the possibility of Dis-economies of

Page 44 of 50!
scale, which is a problem that may occur if the scale of business is increased too much.
The costs related to the mergers such as transferring assets, and achieve fully integration
was also found to be a considerable risk. The third problem that may arise is that the
output flexibility may decrease because of the increased firm size.
Other problems related to horizontal mergers are the possibilities of a reduction in
consumer welfare caused by the increased market concentration in the merger markets.

The empirical research found that the “Target group” seemed to be the less performing
group, which was consistent with the concept of “Market for corporate control”. It was
not found any significant differences between the two groups in the post-merger period,
and hence all the 3 hypotheses were rejected, and it was concluded that there were no
strong relationships between mergers and efficiency gains. I further found that those years
with biggest differences were generally characterized by high standard deviations, which
indicated that there were big differences within the samples, making those findings less
reliable.
I also emphasized that it is impossible to know how the variables would look like if the
mergers never happened, and hence the real merger effect remains ambiguous.
! !

Page 45 of 50!
 Reference!List!
!
!
Adams,!R!(2012)!“Consolidation!and!Merger!Activity!in!the!United!States!Banking!
Industry!from!2000!through!2010”,!Finance!and!Econoics!Discussion!Series,!!
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Altunbas,!Y.,!Manganelli,!S.!and!Marques1Ibanez,!D!(2012)!1!Bank!Risk!during!the!Great!
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Bryan,!L.!(2007).!McKinsey!Quarterly!
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Dewey,!D.!(1961)!Mergers!and!cartels:!some!reservations!about!policy,!American!
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Eriksson,!P!&!Kovalainen,!A!(2012).!Qualitative!Methods!in!Business!Research,!(pp!17118,!
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EU!Guidelines!on!the!assessment!of!horizontal!mergers!
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Fiegenbaum,!A!and!Karnani,!A!(1991)!“Output!Flexibility!–!A!Competitive!Advantage!for!
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Grossman,!G!and!Shapiro,!C.!(1986)!“Research!Joint!Ventures:!An!Antitrust!Analysis”.!
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Gugler,!K.,!Mueller,!D.C.,!Yurtoglu,!B.B.!and!Zulehner,!C.!(2003)!The!effects!of!mergers:!
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Graves,!D.!1981,!“Individual!Reactions!to!a!Merger!of!Two!Small!Firms!of!Brokers!in!the!
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!

Appendices!

Page 50 of 50!
 Appendix(1(
!
!
!
!

US"bank"failures"
180!
160!
140!
120!
#"banks"

100!
80!
60! US!bank!failures!
40!
20!
0!

Year"
!
!
Source:!Federal!Deposit!Insurance!Corporation,!Retrieved!from:!
https://www2.fdic.gov/hsob/HSOBSummaryRpt.asp?BegYear=2000&EndYear=2013
&State=2&Header=1F
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
 Appendix(2(
!
PreDMerger,!CostDtoDincome,!Target!group!compared!to!Control!group!
!
80!

70!

60!

50!
CIR"(%)"

40!
Target!group!
30! Control!group!

20!

10!

0!
2004! 2005! 2006! 2007!
Year"
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!

Appendix(3(
!
STD!CIR!

CIR"Merger"group"
100,00!

80,00!

60,00!

40,00! CIR!Merger!group!

20,00!

0,00!
2004!2005!2006!2007!2008!2009!2010!2011!2012!2013!
!
!
!
!

CIR"Control"group"
!120,00!!

!100,00!!

!80,00!!

!60,00!!
CIR!Control!group!
!40,00!!

!20,00!!

!D!!!!
2004!2005!2006!2007!2008!2009!2010!2011!2012!2013!
!
!
!
!
!
!
!
!
!
!
!
!
!
!

Appendix(4(
!
PreDmerger!comparison!of!ROA!for!Acquirer,!Target!and!Control!group.!
!
3,5!

3!

2,5!
ROA"(%)"

2!
Target!group!
1,5! Control!group!

1! Acquirer!group!

0,5!

0!
2004! 2005! 2006! 2007!
Year"
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!

Appendix(5(
!

ROA"Merger"group"
4,00!
3,50!
3,00!
2,50!
2,00!
1,50!
ROA!Merger!group!
1,00!
0,50!
0,00!
D0,50! 2004!2005!2006!2007!2008!2009!2010!2011!2012!2013!
D1,00!
D1,50!
!
!
!

ROA"Control"group"
5!

4!

3!

2!

1! ROA!Control!group!

0!
2004! 2005!2006! 2007!2008! 2009! 2010! 2011! 2012! 2013!
D1!

D2!

D3!
!
!
!
!
!
!
!
!
!

Appendix(6(
!
!
PreDmerger!comparison!of!PPE!for!Acquirer,!Target!and!Control!group.!
140000!

120000!

100000!
Dollar"

80000!
Target!PPE!
60000!
Control!PPE!
40000! Acquirer!PPE!
20000!

0!
2004! 2005! 2006! 2007!
Year"
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
! !
!
!
!
!
!
!
!

Appendix(7(
!
!

PPE"Merger"group"
200000!

150000!

100000!

50000! PPE!Merger!group!

0!

D50000!

D100000!
!
!
!

PPE"Control"group"
!200!000!!

!150!000!!

!100!000!!

!50!000!!
PPE!Control!group!
!D!!!!

D50!000!!

D100!000!!

D150!000!!
!
!
!
!
!
!
!
!
!
!
!
!
!
!

Appendices(not(directly(referred(to(
!
!
!

Number"of"mergers"in"the"US"
banking"industry"
300!
250!
200!
#"banks"

150!
100!
Number!of!mergers!
50!
0!
2000!
2001!
2002!
2003!
2004!
2005!

2007!

2009!
2010!
2006!

2008!

Year"
!
Source:!Adams,'R'(2012)'“Consolidation'and'Merger'Activity'in'the'United'States'
Banking'Industry'from'2000'through'2010”,'Finance'and'Econoics'Discussion'Series,''
Divisions'of'Research'&'Statistics'and'Monetary'Affairs'Federal'Reserve'Board,'
Washington'DC'
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
 !
!
!
!
!
  !
! Table 1: Acquired Assets, Deposits, and Offices 2000 to 2010
!
!
! Assets Deposits Offices

Year ! of
Number
mergers
! Mean Median Amount Industry Mean Median Amount Industry Mean Median Amount Industry
% % %
!
ALL !2403 1,705,992 134,713 4,099,498,050 -- 1,077,202 111,820 2,588,517,311 -- 17 3 41,615 --

2000 ! 257 703,853 121,363 180,890,307 2.7 382,664 103,228 98,344,720 2.3 11 4 2,837 3.3

!
2001 235 1,422,742 133,910 334,344,324 4.7 935,266 107,669 219,787,415 4.8 20 4 4,649 5.4
!
2002 204 733,747 110,640 149,684,286 1.9 427,982 97,353 87,308,313 1.8 9 3 1,747 2.0
!
2003
! 203 450,153 108,540 91,381,062 1.1 334,370 88,311 67,877,014 1.3 9 3 1,776 2.0

2004 ! 259 3,158,784 155,809 818,124,982 8.9 1,886,919 134,596 488,711,932 8.6 33 4 8,496 9.5

2005 ! 207 566,092 130,743 117,181,125 1.2 400,936 108,475 82,993,846 1.3 10 3 1,972 2.1

2006
! 256 1,230,822 132,041 315,090,507 3.0 734,649 110,206 188,070,266 2.8 11 3 2,857 3.0
!
2007 249 1,442,120 140,215 359,087,886 3.1 914,140 120,049 227,620,907 3.3 13 4 3,319 3.4
!
2008 195 7,028,747 109,740 1,370,605,745 11.1 438,738 92,305 855,540,691 11.4 50 3 9,670 9.8
!
2009
! 158 1,629,688 195,617 257,490,686 2.2 1,179,248 166,917 186,321,236 2.4 18 4 2,831 2.8

2010 ! 180 586,762 170,898 105,617,140 0.9 477,450 149,056 85,940,971 1.1 8 3 1,461 1.5

!
!
18 
 
!
!Source:!Adams,'R'(2012)'“Consolidation'and'Merger'Activity'in'the'United'States'
Banking'Industry'from'2000'through'2010”,'Finance'and'Econoics'Discussion'Series,''
Divisions'of'Research'&'Statistics'and'Monetary'Affairs'Federal'Reserve'Board,'
Washington'DC'
!