The acquisition of commercial banks by bank holding companies : a valuation approach

Vita.The substantial growth and increased concentration of banking resources in bank holding companies (BHCs) within the last decade have created a great deal of interest in the cause and effects of this movement. The area receiving the most attention has been the competitive impact of affiliation on the performance of acquired banks. On average, results have consistently shown that affiliation has not significantly altered the operational efficiency of the banks involved. The specific finding that bank profitability is not improved through affiliation (relative to independent banks) calls into question the motivation for banks' and BHCs' participation in acquisitions. Previous tests of potential benefits to owners have revealed that bank shareholders (when acquisitions involve an exchange of BHC stock for bank stock) have received claims on BHC earnings worth substantially more than the market value of their bank stock. These "premiums" paid for bank stock (transmitted through exchange ratios between stocks) have apparently assured an improvement in bank owners' wealth. On the other hand, BHCs appear to have bid away all potential benefits to their owners. This conclusion is based on the assumption that the profitability of acquired banks must improve substantially to offset the dilution in the ownership position of BHC stockholders. No consideration is made for the impact an affiliated bank may have on the level and stability of earnings of other subsidiaries and the entire organization. This dissertation analyzes the motivation within a valuation framework that considers both owners' concern for levels of earnings on which they have claims and the manner in which those earnings are valued.