Shareholder effects from mergers in the Greek banking industry

Transcription

1 Shareholder effects from mergers in the Greek banking industry Constantine Manasakis Department of Economics, University of Crete, University Campus at Gallos, Rethymnon , Greece December 2004 Abstract The scope of this paper is to examine the stock market valuation of mergers and acquisitions in the Greek banking and financial services industry, in the post-deregulation era. Our results indicate that targets shareholders earned significant abnormal returns upon the announcement of horizontal and diversifying deals. On the contrary, bidders shareholders had significant losses in cases of horizontal and zero effects in diversifying deals. Although mergers and acquisitions in the Greek banking industry were not value-enhancing, they can be explained as an external growth strategy whose goal was to strengthen participants position in the domestic market and help them to become more tenacious in the fiercely competitive international environment. JEL classification: G34; G21; G14 Keywords: Mergers and Acquisitions; Banking; Valuation effects 1 Introduction Over the last two decades, the banking and financial services industry has been subject to an ongoing reconstruction process with increase in consolidation activity, through Mergers and Acquisitions (M&A), as a major aspect of that process. 1 Academics and policy-makers recognize that the internationalization of markets has played a key role on the above evolution. The removal of barriers to geographic competition gives to companies access to new markets. In addition, the internationalization of capital markets facilitates worldwide financing address: manasakis@stud.soc.uoc.gr 1 Cybo-Ottone and Murgia (2000) suggest that at the beginning of this period, US deals dominated the scene but, more recently, M&As in European banking have started to catch up. 1

2 sources and investment opportunities. The consolidation process through M&A has been favored by the advances in information and communication technologies (ICT). ICT favor the development of new products and reduce operational costs through the automation of procedures and the organization of internal data transfers. Mishkin (1998) observes that regulatory and technological changes allow banks to expand geographically and become larger. He also predicts that the trend will continue and that in twenty years the number of banks will be less than half of the current number. Especially for the case of the E.U., the harmonization of regulation and supervision of financial markets, the introduction of the euro and the need for the creation of a single market for financial services were the main factors behind the financial consolidation process that took place during the 1990s. M&A have been so far mainly domestic across the E.U. Member States, but it is expected that the ongoing enlargement will facilitate an E.U. level M&A wave. 2 There is plenty of empirical evidence for the effects of M&A on participants value and shareholders wealth for the U.S. case, while evidence for Europe remains limited. In general, empirical findings suggest that targets shareholders gain significant abnormal returns, while results for bidders shareholders vary around zero. However, the case of Greece has not attracted research interest, although the deregulation of the Greek banking industry was followed by a serious number of M&A that conduced to a major extend on the reconstruction of the relevant market, during the second half of the previous decade. The precise scope for this paper is to shed some light on the participants value and shareholders wealth effects caused by the above M&A in Greece. Using the event study methodology, we estimate abnormal returns for bidders, targets and combined firms, for a sample of 19 M&A in the Greek banking and financial services industry, for the period Our sample contains all these M&A where at least one of the participants was a banking firm publicly traded in the Athens Stock Exchange (ASE) at the time of the deal. Our results indicate that targets shareholders had highly significant gains, especially in horizontal M&A, varying from 19% for the ±5 day event window, to 40% for the ±20 day window. Although bidders shareholders had neither gains nor losses in total, in cases of horizontal M&A they had significant losses about 10%. Thus, we suggest that targets shareholders perceived M&A as a vehicle to empower their position in the Greek market and ensure their survival in the EU market, while bidders perceived them as a threat for losing the control over the management of the post-merger combined firm. We also shed some light on the incentives behind M&A in the Greek banking industry. Two distinct hypotheses have been established on the literature for M&A incentives: The synergy hypothesis and the hubris hypothesis. Using stock-market data, we test the above competing hypotheses. Our findings suggest that M&A had no effects on the combined firms value. Although our results are in line with the bulk of the relevant literature, findings for the case of Greece must be interpreted under the prism of the recent deregulation of the 2 See for instance McKinsey (2002) and Morgan Stanley (2003). 2

3 market. Thus, we explain M&A in the Greek banking industry as a twofold strategy: Bidder banks abstained from being acquired from domestic competitors and at the same time they increased their market share and asset value. Therefore, even they were to be acquired in the future, they could charge a high value. At the same time, participants strengthened their position in the domestic market and became more tenacious in the fiercely competitive international environment. The rest paper is organized as follows. Section 2 reviews the recent literature on the shareholder wealth effects of M&A. Recent changes in the Greek banking industry are presented in section 3 and section 4 describes the sample. Section 5 describes briefly the method used while section 6 presents the empirical analysis and results. Finally, section 7 concludes the paper. 2 A survey of the recent literature There is a remarkable series of papers, relatively to the stock market valuation of M&A in the banking industry, but most of the available evidence comes from the U.S. market. Pilloff and Santomero (1998) underline that although until the end of nineties the number and value of bank M&A in the U.S. was growing, academic studies could not show any significant gains, either in value or in performance, from these transactions. Becher (2000), surveying the early evidence for the U.S., documents that target firms gain about 20% and bidder firms roughly break even. 3 The author also examines the valuation effects of 558 bank mergers from in the U.S. and finds that bank M&A do create wealth. On average, over a 36-day event window, targets shareholders gain over 22%, bidders break even, and combined firms gain 3%. Examining returns over an 11-day window, results remain robust with the exception of the returns for bidders that become negative. De Long (2001) presents the most recent evidence for the U.S. His sample consists by 280 domestic M&A, announced from 1988 to 1995 between publicly traded firms. In each case at least one of the participants was a banking firm. He classifies M&A according to the activity and geographic similarity (focus) or dissimilarity (diversification) of participants and finds that only M&A that focus both geography and activities earn a positive 3.0% return, while all other cases neither create nor destroy shareholder wealth. Recently, M&A in the European banking market have also attracted research interest. Cybo-Ottone and Murgia (2000) examine 72 cases of M&A deals that were announced in the E.U. Member States markets (except Greece and Luxembourg) and Switzerland, from 1988 to They find significant and highly positive wealth effects for targets shareholders, varying from 12.93% to 15.3% 3 This evidence is based on the papers of James and Wier (1987), Neely (1987), Trifts and Scanlon (1987), Cornett and De (1991), Houston and Ryngaert (1994, 1997). The author notes that variation does exist among these measurements of wealth effects. Although all studies find that target firms gain significantly, gains vary from 9.66% (Cornett and De, 1991) to 36.22% (Neely, 1987). In addition, two studies find significantly returns for bidders, two others significantly negative and two papers suggest zero effects. In general, returns to bidders range from significantly negative (-3.25%) to significantly positive (3.12%). 3

4 as the event window covers ±1 to ±20 days from the event respectively. Although their findings for targets are in line with evidence from the U.S., the corresponding for acquiring banks indicate that bidders shareholders also gain, but only in the shorter event windows. They also find a significant increase in stock market value for the combined firm at the time of the deals announcement. Finally, they find positive results for deals between banks and insurance firms, while deals where securities firms participated did not cause any market reaction. Goergen and Renneboog (2003) present the most recent evidence for the E.U. Examining a sample of 22 M&A deals in 18 European countries for the period , they find results consistent with the corresponding of Cybo- Ottone and Murgia (2000). However, even this study does not contain M&A from the Greek banking industry. 3 The evolution of the Greek banking industry Until the mid-80s, the Greek banking sector was operating under regulation that was carried out through a complex system of credit rules, with administrative fixed interest rates. Tsionas et al. (2003) note that these rules aimed at influencing the asset structure of the credit system in a way conductive to the government s economic policy priorities, such as promoting small and mediumsized enterprises and financing state-owned firms. The relevant market was strongly oligopolistic, dominated by a small number of large, state banks. 4 By the mid-1980s, the need for a flexible and market-oriented banking and financial system, and the prospects for participating in the Single European Market, initiated efforts towards the deregulation of the Greek banking industry. Market deregulation began in 1987 and by the early 1990s, bank interest rates had been gradually liberalized and all quantitative credit restrictions and investment requirements, concerning the financing of the public sector, had been phased-out. Moreover, the central bank had authorized commercial banks to launch new financial products, such as leasing, factoring and venture capital, and specialized credit institutions were permitted to expand their activities in commercial banking. The Basic Banking Law, concerning establishment, operation and supervision of credit institutions, incorporated the provision of the Second Banking Directive and was passed in It set out the principles of banking in the Single European financial market and provided equal competitive conditions for all European banking institutions. Foreign exchange controls concerning current transactions were lifted in 1992, while capital movements were completely liberalized in May The privatization of several banks and the entrance of new, mainly small, private banks were also important developments in the second half of the past decade that also contributed to the enhancement of competition in the market. However, deregulation did not lead to any significant increase in foreign presence in the banking sector in the 1990s in terms of the number of banks. In 4 A complete review for the evolution of the Greek banking industry can be found at Pagoulatos (1999). 4

5 total, deregulation decreased the oligopolistic character of the Greek banking industry. 5 It is evident that from the mid 1990s, the Greek banking system started opperating under increased competition and internationalization. Tsionas et al. (2003) note that banks operating in Greece had to adjust to new conditions and cope with the ensuing intensified domestic and cross-border competition. Thus, Greek banks had to make efforts in order to increase or, at least, maintain their domestic market shares, facilitate their access to international financial markets and exploit any possible economies of scale. M&A in the Greek banking industry, recorded since the mid-1990s, can be seen as a vehicle to attain the above goals. Several Greek banks have been involved in M&A, since Most of these deals concerned the domestic market, including not only banks but also non-bank financial enterprises. Some large credit institutions opted to merge with their subsidiaries with a view of restructuring their activities and cutting their operating expenses. Additionally, several banks have tried to expand or further develop their activities in sectors such as bancassurance, where they can profit from synergies and cross-selling by both bank networks and insurance companies. 6 Recent changes in the Greek banking industry have attracted serious research interest but research has mainly focused on efficiency, competitiveness and profitability issues. Although M&A have played a central role on the reconstruction of the Greek banking industry, during the post-deregulation era, no research attempt to examine their value effects has been made, and this is theprecisescopeofthispaper. 7 5 Tsionas et al. (2003) present evidence according to which, over the period , there has been a decline on the concentration ratio of the commercial banking market. More precisely, the Herfindahl index (the sum of squares of market shares calculated over bank deposits of the Greek banking system) decreased from 0.31 in 1993 to 0.25 in Kamberoglou et al. (2004) mention that mergers and acquisitions in the Greek banking industry resulted in higher concentration: the market share of the top-5 banks as a percentage of total assets rose from 57% in 1995 to 65% in This, however, has not led to less competition. 7 Karafolas and Mantakas (1996), using a sample of 11 Greek banks over the period , find insignificant total cost scale economies, while operating cost economies of scale are estimated to be significant. Hondroyiannis et al. (1999) used the Rosse-Panzar statistic to assess competitive conditions in the Greek banking system over the period Their results suggest that the gradual elimination of exchange controls, the capital movement liberalization, the enactment of the Second Banking Directive of the European Union and the supervisory arrangements is related to the competitive conditions of the Greek banking system. Eichengreen and Gibson (2001), investigating the profitability of 25 Greek banks over the period , document a bell-shaped relationship between profitability and bank size, implying that profitability initially increases and then declines as bank size increases. Spathis et al. (2002), exploring a sample of 23 Greek banks for the period , find that small banks are characterized by high capital yield, high interest rate yield, high financial leverage and high capital adequacy, while large banks are characterized by high asset yield and low capital and interest rate yield. Using multicriteria decision aid methodologies they conclude that large banks are more efficient than small ones. Tsionas et al. (2003) estimate economic efficiency, TFP change and technical change in the Greek banking industry over the period The results showed that the positive TFP change of the Greek banking system is associated to efficiency improvement for the medium-sized banks and to technical change 5

6 4 The sample Since the mid-1990s several Greek banks have been involved in M&A not only with banks but also with non-bank financial enterprises. From 1995 to 2001, 19 M&A had been recorded in Greece, in which at least one of the participants was a banking firm, publicly traded in the Athens Stock Exchange (ASE) at the time of the deal, and the transaction led to changes in the targets control. The final sample is presented in table A of the Appendix. Note that the bidder firm was a commercial bank in all cases. Then, we classify the above cases in horizontal and diversifying M&A, according to the activity of participating firms. In order to classify a case as a horizontal one, both participants had to be commercial banks, with 3-digit SIC 652. In cases where only the bidder s 3-digit SIC was 652, the deal is classified as a diversifying one. 8 We further classify diversifying M&A in three sub categories: In cases where the target firm was an insurance company, a security firm and finally, an investment bank In the above 19 cases, bidders were publicly traded in the ASE, with the exception of cases 5 and 10, while target firmswerelistedinhalfofthecases. 11 A final classification considers target firms: In most cases the target was a domestic firm, but there are also cases (4, 12, 14 and 19) where the target firm was a foreign one with a network of branches in Greece. Although our sample is small, compared with samples of relevant papers, it should be mentioned that it contains all these M&A deals that affected primarily the reconstruction of the Greek banking and financial services industry in the post-deregulation era. Thus, this paper seeks to shed some light on the wealth effects of M&A in a consistently core industry for the Greek economy, through time. It should also be mentioned that this paper is in general the first attempt to apply the event study methodology for M&A deals in Greece. improvement for larger institutions. Finally, Kamberoglou et al. (2004) investigate cost efficiency in a panel of Greek banks over the period and they find hat important cost X-inefficiencies are in place. They also provide some evidence according to which bank characteristics such as bank size, type of ownership and risk behavior do play a role in explaining differences in measured inefficiencies. Scale economies are also examined and the findings indicate that the Greek banking industry experiences economies of scale, though they have declined throughout the observed period. 8 Cases 4, 5, 7, 8, 9, 10, 12, 13, 14 and 16 are classified as horizontal M&A and cases 1,2,3,6,11,15,17,18 and 19 as diversifying. 9 The target firm was an insurance company in cases 1, 11 and 19, while, in cases 3, 6 and 15 the target was a security firm. Finally, in cases 2, 17 and 18, it was an investment bank. 10 Cybo-Ottone and Murgia (2000) mention that the universal banking structure, that characterizes Europe, implies that there are less stringent limits to product market diversification from commercial banking into investment banking, compared with the US market. Bancassurance is a European phenomenon as regulations allow EU banks to own insurance subsidiaries and to perform in direct distribution of insurance products. 11 Target firms were listed in cases 1, 5, 8, 9, 10, 13, 16, 17 and 18. 6

7 5 The method According to the semi-strong version of the efficient market hypothesis, all publicly-available information is reflected completely in the price of the stock and only an unanticipated event can change that price. Given rationality in the marketplace, the effects of the event will be reflected immediately in securities prices. Change in one security s price should then be equal with the expected changes, caused by the event, in the future cash flows of the firm. To measure the short-term wealth effects for bidding firms, target firms and combined firms, caused by M&A deals, we use the event study methodology. 12 For each merger deal we first define the event of interest and its date (that is the event date t 0 ) and determine the event window [T 1,T 2 ] with t 0 [T 1,T 2 ]. Then, the market model (R it = ba i + b β i R mt +e it ), estimated for a period ending at T 1,gives ba i and b β i for every security, with E(e it )=0and Var(e it )=σ 2 ei. R it is the observed return on security i for event day t and R mt is the market index portfolio rate of return in date t. Estimators ba i and b β i are used to predict the normal return c R it for each participant s security, for each day of the event window, with c R it = ba i + b β i R mt. Abnormal return for each day of the event winow is given by AR it = R it E(R it X t ),wherear it, R it,ande(r it X t ) are the abnormal, actual, and normal return respectively for day t,withx t the conditioning information for the normal return model. AR it = R it E(R it X t ) is transformed in eq. (1): AR it = R it ( ba i + β b i R mt ) (1) with AR it N(0,Var(AR it )) and Var(AR it )=σ 2 ei. We then estimate Cumulative Abnormal Return (CAR)forfirm i, overthe event window, using eq. (2): XT 2 CAR i (T 1,T 2 )= AR it (2) T 1 Var[CAR i (T 1,T 2 )] = (T 2 T 1 +1)σ 2 ei and under the null hypothesis, the event under study has no impact on merger participants value. To gauge statistical significance, we perform a Z-test, with Z = CARi(T1,T2). (T2 T 1 +1)σ 2 ei An aggregation of interest can also be performed across both time and events. In that scenario, the Cumulative Average Abnormal Return (CAAR) is given by eq. (3): CAAR(T 1,T 2 )= 1 N NX CAR i (3) where N is the number of firms (or events, equivalently) and Var[CAAR(T 1,T 2 )] = 12 For an excellent presentation of the event study methodology see MacKinlay (1997). i 7

8 1 N 2 NP i σ 2 i. Under the null hypothesis, the event under study has no impact on participants value, and the CAAR is zero, with Z = CAAR(T 1,T 2 ). (T2 T 1+1)σ 2 ei Looking only at the two separate entities may give a partial and perhaps distorted interpretation of the market reaction to the deal s announcement. Thus, in cases where both participants are publicly traded, a further step is to evaluate the market s expectations on the combined gain resulting from the merger deal. Following Houston and Ryngaert (1994), we estimate the Total Cumulated Abnormal Returns (TCAR) as a weighted sum of bidder s and target s Cumulated Abnormal Returns according to the following equation: TCAR i (T 1,T 2 )= MV B CAR B + MV T CAR T (4) MV B + MV T MV B and MV T is the value of the bidder and target firm respectively, t days before the event date. In addition, CAR B and CAR T are the cumulative abnormal returns for the bidder and the target firm respectively, over the event window. Following Houston and Ryngaert (1994), Var[TCAR i (T 1,T 2 )] = ³ 2 ³ 2 MV B MV B +MV T MV CARB + T MV B +MV T CART + +2 MVB MV B +MV T MVT MV B +MV T ρ BT p Var(CAR B ) Var(CAR T ),with ρ BT the estimated correlation between bidder s and target s market model residuals for estimation of marked model prior to the event date. To gauge statistical TCAR significance, we perform the corresponding Z-test, with Z = i (T 1,T 2 ). Var[TCARi (T 1,T 2 )] 6 Results In order to examine shareholders wealth effects, caused by M&A deals in the Greek banking industry, Cumulative Abnormal Returns (CAR), Cumulative Average Abnormal Returns (CAAR) and Total Cumulated Abnormal Returns (TCAR) have been measured for three different event windows (±5, ±10 and ±20). These different event windows have been chosen for evaluating better the market reaction on the event and testing the robustness of our results. 13 For each deal, as event date, the announcement date has been used. The announcement date was the first public offer from the bidder bank to the target bank, or the first joint announcement (executive boards of both participants) of the agreement to go forward a merger or acquisition. The announcement dates were found from bidders daily reports to the Athens Stock Exchange (ASE). For the OLS, daily returns for the securities and the General Market Index were used, from -220 to -20 days before the announcement of the deal. 13 Surveying existing papers, one concludes that there is little consensus about the start of the event window. On one hand, the measurement error may be substantial when using narrow event windows but on the other hand, as we increase the length of the announcement period, the noise-to-signal ratio increases, and it becomes increasingly difficult to measure the impact of the event on share price with precision. To overcome this weakness, we use three different in order to test the robustness of our results. 8

9 In cases where one participant was not publicly traded for a full 220 trading days before the event, we include observations available. To construct daily return for each firm, dividends have been taken into account. The data set for the securities and the market s portfolio returns was obtained from the Athens Stock Exchange Data Bank. 6.1 Target versus bidding firms Panel A of table 1 shows that M&A deals in the Greek banking industry had no wealth effects for bidders shareholders. Although Cumulative Average Abnormal Returns are negative, they do not differ from zero. This is a consistent finding across different event windows. This finding is in line with the bulk of the existing M&A literature, using event study methodology, regardless the industry examined. Roller et al. (2001), surveying an extended series of papers, conclude that on average, bidders shareholders have no gains. Although some times they do slightly better, some other times they have losses. In contrast to the bidders zero effects, evidence in panel B of table 1 demonstrates that M&A had positive and highly significant effects for targets shareholders. For the short event window (±5 days from the event), targets shareholders earn about 20% significant cumulative average abnormal returns, with CAAR increasing in the expansion of the event window, reaching about 34,6% for the ±20 day period. Evidence presented here is also in line with findings for targets shareholders (see also Roller et al., 2001), according to which, the average target shareholder gain varies between 20 to 35 percent. Focusing on the literature for the banking industry, our findings coincide with these of Becher (2000), who documents that targets shareholders gain positive abnormal returns, increasing in the expansion of the event window, while results for bidder firms, are sensitive on the event window, with results being significantly negative for longer event windows. Our results are also in line with results reported by Cybo-Ottone and Murgia (2000), with the exception 9

10 that for extremely short event windows (±1 and ±2 days)they find positive abnormal returns for bidders. De Long (2001) finds that although targets earn consistently, bidders have significant losses in almost all cases. 6.2 Horizontal versus diversifying M&A Cases included in our sample have been classified in horizontal and diversifying M&A, according to the activity of the participants firms. Horizontal M&A, where both participants were commercial banks, could create value through the increase of market power and economies of scale, while diversifying M&A, where only the bidder firm was a commercial bank, could create value through the expansion of the services offered and the formation of an effective internal capital market, lowering the cost of capital. Thus, how does the type of merger affect shareholders wealth effects measured by cumulative average abnormal returns? Horizontal M&A Let us begin with the case of horizontal M&A. Panel A of table 2 shows that horizontal M&A deals caused almost -9,8% losses for bidders shareholders, significant at the 1% level. However, these losses seem to be abolished in the expansion of the event window. It should also be mentioned that bidders losses are sensitive on whether the target firm was publicly traded in the Athens Stock Exchange (ASE). In cases where the target firm was publicly traded, bidders have significant losses about -15.7% for the ±5 day event window, with losses decreasing in the expansion of the window. In contrast to that, for cases where the target firm was not publicly traded, bidders have neither gains nor losses. Regardless the potential economies of scale and the certain market share increase, the above results (consistent with findings of Houston and Ryngaert, 1994; 1997; Cybo-Ottone and Murgia, 2000) express the possible threat that bidders faced, for losing partially the control over the management of the postmerger combined firm, given that the target firm was also listed in the ASE and thus a strong competitor. In general, we conclude that for the horizontal M&A, results for bidders are sensitive on the width of the event window and on whether the target firmwaslistedintheaseornot. On the contrary, targets shareholders had significant gains 19% for the ±5 day event window, with CAAR increasing in the expansion of the window, reaching 40% for the ±20 day window, all significant at the 1% level. Evidence presented in panel B of table 2, also consistent with the bulk of the relevant literature, suggests that targets shareholders perceived the horizontal M&A deals, as opportunities for increased profits and dividend yields. Results for targets shareholders in horizontal M&A, have to be illustrated under the prism of the recent deregulation and the subsequent exposure of Greek banks to the highly competitive global banking and financial services industry. These changes made clear that Greek commercial banks, although medium-sized for the domestic banking industry, were highly threatened if they were to choose 10

11 a standing-alone strategy in the global market environment. Thus, targets shareholders perceived M&A as a vehicle to empower their position in the Greek market and ensure their survival in the EU market. Our results coincide perfectly with the bulk of the relevant literature for the banking industry, where targets shareholders gain significant abnormal returns Diversifying M&A Let us now examine shareholders wealth effects caused by diversifying M&A deals in the Greek banking industry. Panel A of table 3 shows that diversifying M&A had neither positive nor negative wealth effects for bidders shareholders. Thus, commercial banks shareholders did not foresee any profits increase through cross-products deals; regardless the type of the target firm. Evidence by De Long (2001) suggests negative CAAR for bidders shareholders in diversifying M&A, while Cybo-Ottone and Murgia (2000) document wealth gains on the announcement of a diversifying merger or acquisition and especially in cases of bancassurance. 11

12 According to targets shareholders, findings presented in panel B of table 3 indicate significant wealth gains, varying from 22% to 24% for the different event windows. The explanation of this result is similar with the corresponding for targets shareholders in horizontal M&A, given above. In addition, CAAR for insurance firms and investment banks shareholders, although different in magnitude, are not statistically different from each other. Although results for bidders shareholders in cases of diversifying M&A seem to be inconclusive in the literature, results for targets are consistent and our results are also in line with the corresponding documented by Cybo-Ottone and Murgia (2000) and De Long (2001). 6.3 Investigating the incentives behind M&A Merger and acquisition activity results in overall benefits to investors if the combined post-merger firm is more valuable than the sum of the two separate pre-merger firms. The primary cause of this gain in value is supposed to be the performance improvement following the merger. Using financial market data, an event study measures the impact of M&A deals on firms value and shareholders wealth. However, looking only at the two separate entities may give a partial interpretation of the market reaction to the deal s announcement. Thus, we estimate the Total Cumulated Abnormal Returns (TCAR) inorderto evaluate the combined post-merger firm s value. Following Becher (2000), MV B and MV T is the value of the bidder and target firm respectively, 30 days before the event date. Additionally, CAR B and CAR T are the cumulative abnormal returns for the bidder and the target firm respectively, over the ±5, ±10 and ±20 day event window. By doing so, we shed some light on the incentives behind M&A: 14 The 14 The analysis here follows Houston and Ryngaert (1994), Becher (2000) and De Long 12

13 announcement of a merger or acquisition deal is usually followed by statements according to which, the incentives behind such a deal have their origins on the synergies that will be gained and the subsequent efficiency improvements and increase in competitiveness. However, there are M&A where either these synergies are optimistic, or the actual incentives behind these transactions are grounded on the ambitions of bidder firm s managers. Therefore, two distinct hypotheses of M&A incentives have been presented in the previous literature: the synergy hypothesis and the hubris (or empire building) hypothesis. 15 If attaining synergies is the objective of the deal, we assume that the managers of both the target and acquirer intend to maximize shareholder value and we expect a positive effect on the combined post-merger firm s value. According to the hubris hypothesis, a merger or acquisition deal does not aim at increasing the combined firm s value but can be seen as the result of the bidder firm top management team s hubris. The hubris hypothesis is twofold: M&A can be part of the above team behavior to stimulate corporate growth, rather than corporate value, as manager s private benefits tend to grow with firm size. On the other hand, M&A can be the result of over-optimistic estimations in evaluating potential post-merger synergies and efficiency improvements. Under the hubris hypothesis, we expect that the deal will have either a zero or a negative effect on the combined post-merger firm s value. Thus, we evaluate the market s expectations on the combined gain resulting from the merger or acquisition, using eq. (5), for the three different event windows. Detailed results are presented in table 4. A consistent finding is that M&A deals in the Greek banking industry had no effects on the combined post-merger firm s value, a finding that holds for horizontal and diversifying cases. Negative abnormal returns to bidders offset positive abnormal return to targets. 16 (2001). 15 For a complete presentation of different theories for M&A motives, see Trautwein (1990). 16 Evidence in the recent literature is mixed. Becher (2000) finds 3% significant cumulative abnormal returns for the combined firm, while De Long (2001) suggests that mergers in the banking industry neither create nor destroy combined firm s value. Only in the special case where mergers that focus both geography and activities, combined firm s value increases about 3%. Finally, evidence for the European banking industry presented by Cybo-Ottone and Murgia (2000) suggests that there is an increase about 3% in value for the average merger at the time of the deal. 13

14 Thus, following the taxonomy that the established literature suggests, M&A in the Greek banking and financial industry were driven by the hubris and not by the synergy hypothesis. However, in order to interpret our results, the evolution and the recent deregulation of the Greek banking industry have to be taken into account. As it has already been mentioned, the deregulation of the Greek banking industry started at Its exposure on the international competition started at 1992, when the Basic Banking Law, incorporating the provision of the Second Banking Directive, was passed. At the same time, the harmonization of E.U. financial markets regulation and the need for a single market for financial services were the main factors behind an ongoing process of M&A across E.U. countries. In this environment, Greek banks had to strengthen their position in the domestic market, and follow defensive strategies in the international market, for the short run. Exploiting any possible economies of scale seemed to be a medium or long run goal. For this purpose, Greek banks followed strategies of internal and external growth. Internal growth strategies contained the expansion of their network of branches and investments in Information and Communication Tech- 14

15 nologies (ICT). External growth strategies contained horizontal and diversifying M&A. Thus, the strategy for these M&A was the following: Bidder banks abstained from being acquired from domestic competitors and at the same time they increased their market share and asset value. Therefore, even they were to be acquired in the future, they could charge a high value. In general M&A deals in the Greek banking industry must be seen under the prism of its recent deregulation and explained as a twofold strategy: Participants scope was to strengthen their position in the domestic market and become more tenacious in the fiercely competitive international environment. 7 Conclusions The harmonization of regulation and supervision of E.U. financial markets, the introduction of the euro and the need for the creation of a single market for financial services were the main factors behind the financial consolidation process that took place during the 1990s across European countries. Under these circumstances, the deregulation of the Greek banking and financial services industry was followed by a serious number of M&A during the second half of the previous decade. The scope for this paper was to shed some light on the shareholders wealth effects caused by the above M&A. Using event study methodology, we estimate significant abnormal gains upon the announcement of horizontal and diversifying deals for targets shareholders. Bidders shareholders had significant losses in cases of horizontal and zero effects in diversifying deals. Although M&A in the Greek banking industry were not value-enhancing in the short run, they can be seen as an external growth strategy whose goal was to strengthen participants position in the domestic market and help them to become more tenacious in the fiercely competitive international environment. However, further research of the issue, using accounting data, will shed more light on the long-term profitability of M&A in the Greek banking industry. 15

16 8 Appendix 16

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