EVALUATING FINANCIAL SYNERGY IN BANK MERGER: RANKING MERGER OPTIONS AND ANALYZING INFLUENTIAL FACTORS
Keywords:
Merger, Synergy, Financial Factors, Simulation, Sensitivity, Valuation, Banks, Emerging Economy, Bangladesh.
Abstract
Given the excess number of banks, the Central Bank of Bangladesh recently saw mergers as a good solution for economic development in an emerging economy like Bangladesh. Still, the question remained: which bank should merge with whom to create value, known as financial synergy? The study investigates which mergers add value to financial synergy and which do not. Additionally, the study scrutinizes the financial factors that influence the financial synergies resulting from the mergers of the participating banks. This study employs fifty-five possible cases of mergers found in eleven banks, including government, non-government, and specialized banks, to conduct financial synergy valuations on the average of five years of financial information. The methodology employs simulation, sensitivity, trend, scenario, Ordinary Least Squares (OLS), and Mixed Effect Generalized Linear Model (MEGLM) to solve the research questions. The results reveal that mergers between BKB and RAKUB, EXIM and Padma, NBL, and UCB can result in positive financial synergy among the six cases proposed by the central bank. The results also show that financial factors including debt to capital, reinvestment rate, return on capital, cost of debt, and revenues significantly impact the financial synergy. The findings of the study suggest the central bank merge based on the ranking provided in the study, considering the influential factors in mergers among banks. These findings contribute to the existing field of study by optimizing the synergy valuation strategies for bank mergers in a complex environment of bank types.
JEL Classification Codes: G34, G32, C51, G21.
References
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Mucenieks, K. (2018). Factors affecting mergers and acquisitions in the European Union. Humanities and Social Sciences Latvia, 26(2), 102–114. https://doi.org/10.22364/hssl.26.2.7
Peristiani, S. (1997). Do mergers improve the X-efficiency and scale efficiency of U.S. Banks? evidence from the 1980s. Journal of Money, Credit and Banking, 29(3), 326–337. https://doi.org/10.2307/2953697
Režňáková, M., & Pěta, J. (2018). The factors driving the synergy value in mergers of mechanical engineering companies in the Czech Republic. Journal of International Studies, 11(3), 239–254. https://doi.org/10.14254/2071-8330.2018/11-3/19
Sharma, K. P. (2018). The impact of merger and acquisition on customer satisfaction in post- merger phase in banking sector of Nepal. Journal of Nepalese Business Studies, 11(1), 57–69. https://doi.org/10.3126/jnbs.v11i1.24202
Sisodia, G., Jadiyappa, N., & Joseph, A. (2021). The relationship between human capital and firm value: Evidence from Indian firms. Cogent Economics & Finance, 9(1), 1–15. https://doi.org/10.1080/23322039.2021.1954317
Somoy Business Desk. (2024, April 15). Five banks to merge in Bangladesh, more consolidation ahead. Retrieved from https://en.somoynews.tv/news/2024-04-15/five-banks-to-merge-in-bangladesh-more-consolidation-ahead
Sui, Y., & Peculea, A. D. (2016). Financial risk identification and control of cross border merger and Acquisition Enterprises. Audit Financiar, 14(144), 1368–1377. https://doi.org/10.20869/auditf/2016/144/1368
Susanti, N., & Restiana, N. G. (2018). What’s the best factor to determining firm value? Jurnal Keuangan Dan Perbankan, 22(2), 301–309. https://doi.org/10.26905/jkdp.v22i2.1529
TBS Report. (2024, April 4). Sonali-BDBL, Krishi-RAKUB in merger process now. The Business Standard. Retrieved from https://www.tbsnews.net/economy/banking/bdbl-be-merged-sonali-bank-krishi-bank-take-over-rakub-822921
Utami, S. W. (2023). The effect of financial performance and capital structure on company value with company size as a moderation variable. Asian Journal of Economics, Business and Accounting, 23(24), 112–123. https://doi.org/10.9734/ajeba/2023/v23i241191
Vennet, R. V. (1996). The effect of mergers and acquisitions on the efficiency and profitability of EC Credit Institutions. Journal of Banking & Finance, 20(9), 1531–1558. https://doi.org/10.1016/s0378-4266(96)00014-3
Yiannis, T., Sakas, D. P., Konstantopoulos, N., Simos, T. E., & Maroulis, G. (2007). Factors that affect synergies in mergers, at banking sector: Simulation with a dynamic model. AIP Conference Proceedings, 1058–1061. https://doi.org/10.1063/1.2835923
Al-Saidi, M., & Al-Shammari, B. (2014). The relationship between a firm’s value and ownership structure in Kuwait: Simultaneous analyses approach. International Business Research, 7(5), 32–48. https://doi.org/10.5539/ibr.v7n5p32
CFI. (2024, February 2). Financial Synergy Valuation. Corporate Finance Institute. Retrieved from https://corporatefinanceinstitute.com/resources/financial-modeling/financial-synergy-valuation/
Damodaran, A. (2005, November). The value of Synergy. SSRN. https://dx.doi.org/10.2139/ssrn.841486
Damodaran, A. (2024). Country default spreads and risk premiums. Stern School of Business, New York University. Retrieved from https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html
Darayseh, M., & Alsharari, N. M. (2022). Determinants of merger and acquisition in the Banking Sector: An Empirical Study. Meditari Accountancy Research, 31(4), 1093–1108. https://doi.org/10.1108/medar-09-2021-1449
Demirer, M., & Karaduman, O. (2022, October 27). Do mergers and acquisitions improve efficiency: Evidence from Power Plants. Federal Trade Commission. Retrieved from https://www.ftc.gov/system/files/ftc_gov/pdf/demirerkaraduman.pdf
Dhaka Tribune. (2024, March 13). BB tells weak banks to merge with strong ones by December. Dhaka Tribune. Retrieved from https://www.dhakatribune.com/business/banks/341723/bb-tells-weak-banks-to-merge-with-strong-ones-by
Ebodume, E. A., & Omarov, O. (2007, July 19). Do mergers and acquisitions improve efficiency of the banks? - DEA approach in the case of European Banks. GUPEA. Retrieved from https://gupea.ub.gu.se/handle/2077/4686
Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and Bonds. Journal of Financial Economics, 33(1), 3–56. https://doi.org/10.1016/0304-405x(93)90023-5
Fotova Čiković, K., Lozić, J., & Guzovski, M. (2022). Do mergers and acquisitions improve bank efficiency? evidence from North Macedonia. Journal of International Studies, 15(2), 77–93. https://doi.org/10.14254/2071-8330.2022/15-2/6
Fuchs, M. D., Jacob, J., & Kiesel, F. (2024). Where the money is: Branch network structure and bank profitability in Switzerland. The European Journal of Finance, 1–32. https://doi.org/10.1080/1351847x.2024.2344065
Gaughan, P. A. (2018). Mergers, acquisitions, and corporate restructurings. John Wiley & Sons.
Herwadkar, S. S., Gupta, S., & Chavan, V. (2023, February 22). Bank mergers in India have been beneficial to banking sector, says RBI paper. The Indian Express. Retrieved from https://indianexpress.com/article/business/banking-and-finance/bank-mergers-in-india-have-been-beneficial-to-banking-sector-says-rbi-paper-8459161/
Hirtle, B. (2005). The impact of network size on bank branch performance. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.782333
Huiziniga, H. P., Nelissen, J. H. M., & Vennet, R. V. (2001). Efficiency effects of bank mergers and acquisitions in Europe. Retrieved from https://www.researchgate.net/publication/4792266_Efficiency_Effects_of_Bank_Mergers_and_Acquisitions_in_Europe
Jahan, S. (2024, April 21). Bank mergers: All dimensions must be considered. The Daily Star. Retrieved from https://www.thedailystar.net/opinion/views/news/bank-mergers-all-dimensions-must-be-considered-3591266
Khan, M. U., & Bin Tariq, Y. (2023). Synergy or too big to fail: Empirical Analysis of mergers and acquisitions in SAARC and Asean Regions. Cogent Business & Management, 10(1), 1–28. https://doi.org/10.1080/23311975.2023.2172023
Majumdar, S. K., Yaylacicegi, U., & Moussawi, R. (2012). Mergers and synergy: Lessons from contemporary telecommunications history. Telecommunications Policy, 36(2), 140–154. https://doi.org/10.1016/j.telpol.2011.11.010
Mucenieks, K. (2018). Factors affecting mergers and acquisitions in the European Union. Humanities and Social Sciences Latvia, 26(2), 102–114. https://doi.org/10.22364/hssl.26.2.7
Peristiani, S. (1997). Do mergers improve the X-efficiency and scale efficiency of U.S. Banks? evidence from the 1980s. Journal of Money, Credit and Banking, 29(3), 326–337. https://doi.org/10.2307/2953697
Režňáková, M., & Pěta, J. (2018). The factors driving the synergy value in mergers of mechanical engineering companies in the Czech Republic. Journal of International Studies, 11(3), 239–254. https://doi.org/10.14254/2071-8330.2018/11-3/19
Sharma, K. P. (2018). The impact of merger and acquisition on customer satisfaction in post- merger phase in banking sector of Nepal. Journal of Nepalese Business Studies, 11(1), 57–69. https://doi.org/10.3126/jnbs.v11i1.24202
Sisodia, G., Jadiyappa, N., & Joseph, A. (2021). The relationship between human capital and firm value: Evidence from Indian firms. Cogent Economics & Finance, 9(1), 1–15. https://doi.org/10.1080/23322039.2021.1954317
Somoy Business Desk. (2024, April 15). Five banks to merge in Bangladesh, more consolidation ahead. Retrieved from https://en.somoynews.tv/news/2024-04-15/five-banks-to-merge-in-bangladesh-more-consolidation-ahead
Sui, Y., & Peculea, A. D. (2016). Financial risk identification and control of cross border merger and Acquisition Enterprises. Audit Financiar, 14(144), 1368–1377. https://doi.org/10.20869/auditf/2016/144/1368
Susanti, N., & Restiana, N. G. (2018). What’s the best factor to determining firm value? Jurnal Keuangan Dan Perbankan, 22(2), 301–309. https://doi.org/10.26905/jkdp.v22i2.1529
TBS Report. (2024, April 4). Sonali-BDBL, Krishi-RAKUB in merger process now. The Business Standard. Retrieved from https://www.tbsnews.net/economy/banking/bdbl-be-merged-sonali-bank-krishi-bank-take-over-rakub-822921
Utami, S. W. (2023). The effect of financial performance and capital structure on company value with company size as a moderation variable. Asian Journal of Economics, Business and Accounting, 23(24), 112–123. https://doi.org/10.9734/ajeba/2023/v23i241191
Vennet, R. V. (1996). The effect of mergers and acquisitions on the efficiency and profitability of EC Credit Institutions. Journal of Banking & Finance, 20(9), 1531–1558. https://doi.org/10.1016/s0378-4266(96)00014-3
Yiannis, T., Sakas, D. P., Konstantopoulos, N., Simos, T. E., & Maroulis, G. (2007). Factors that affect synergies in mergers, at banking sector: Simulation with a dynamic model. AIP Conference Proceedings, 1058–1061. https://doi.org/10.1063/1.2835923
Published
2024-07-04
How to Cite
Roy, G. (2024). EVALUATING FINANCIAL SYNERGY IN BANK MERGER: RANKING MERGER OPTIONS AND ANALYZING INFLUENTIAL FACTORS. Asian Finance & Banking Review, 8(1), 13-29. https://doi.org/10.46281/asfbr.v8i1.2219
Section
Research Paper/Theoretical Paper/Review Paper/Short Communication Paper
Copyright (c) 2024 Gourav Roy
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