4.2. Baseline Results
As per
Table 3, the size of the bank, computed as a natural logarithm of its assets expressed in EUR, is a significant driver of bank M&As, larger banks thus having an increased probability of being involved in restructuring activity. More precisely, larger banks are 45.8% more prone to take part in an M&A transaction. Usually, financial institutions focus on acquisitions involving smaller and less complex entities, the implementation of which could be accomplished in a shorter time (
Beitel et al. 2004). This particularity has been identified since 1990 when
Hawawini and Itzhak (
1990) observed a significant and positive link between such restructuring operations at the level of 579 banks in the US between 1977 and 1998. Moreover,
Altunbaş and Marqués (
2008) drew a series of features of the bidding bank—on average, its assets are seven times larger and have an intense operational efficiency. The bank that will be acquired has a significant volume of loans, the interest income being almost non-existent. Our findings confirm the hypothesis that cross-border mergers and acquisitions often involve a much more prepared and experienced institution, which can take greater risks. Nonetheless, it is important to note that a smaller bank will generally have a higher share of loans and insignificant capital level regardless of the possibility of an M&A manifestation. The research results are in line with the vast strand of literature, the size of the bank given by the total assets being a main pillar in all five models. On the loans side, the share of nonperforming loans on total gross loans (credit risk) did not turn out to be statistically significant. However, lending activities (net loans/total assets) negatively influence the materialization of a national merger and acquisition or the probability that it will be acquired, contradicting the results of
Altunbaş and Marqués (
2008). On the other side, the higher the share of customer deposits, as an indicator of funding structure, the more prone that a bank will be to initiate a restructuring operation.
The level of profitability and operational efficiency are two other important characteristics of the targeted banks.
Akhavein et al. (
1997) developed two theories, the efficiency hypothesis and the low-efficiency hypothesis, which argue that an entity that does not perform at normal parameters will automatically bring significant gains to the bidding institution after the merger materializes. The first of the two centers around the experience and know-how brought by the bidder bank, compared to the second view according to which the very materialization of the M&A will determine an increase of management motivation and cost-efficiency. The importance of the financial and operational situation of the target bank is also demonstrated by
Pilloff (
1996);
Peek et al. (
1999), and
Berger et al. (
2000). From the profitability point of view, only ROAE is significant for most models, the efficiency captured by cost to income ratio being significantly negative. This implies a direct and proportional relationship between the probability of being targeted and involved in a bidding process by an institution with foreign capital.
Lanine and Vander Vennet (
2007);
Hannan and Pilloff (
2009);
Hernando et al. (
2009), and
Pasiouras et al. (
2011) have conducted various studies on a considerable sample of financial institutions highlighting the characteristics that matter the most in the selection process of the acquired entities, as follows: (i) At the European Union level, the institutions whose performance is more deteriorated (high costs) are more likely to be targeted, supporting the theory that financial synergies materialize much easier if one of the entities is underperforming. For the same reason, mergers and acquisitions of institutions with a more stable and strong level of capital and assets are less likely to be acquired. As per our empirical results, the better capitalized an institution is, the more will focus on cross-border operations. On the efficiency side, the conclusions showed that this is a factor considered only by the targeted parties. (ii) The institutions with a high deposit rate (stable funding structure) or any high savings instrument are more likely to be involved in a restructuring process due to their financial stability. Such institutions can take higher risks and exercise medium to long-term strategies. Our results are in line with these, with the total customer deposits/total assets indicator being a significant factor for the probability that an institution will be involved in such a process, especially within a bidder position. (iii) Large financial institutions are much more attractive for both domestic and cross-border M&As. This finding confirms that targeting the complex entities helps in diversification of products and services, seizing new market segments, and supporting the authorities in creating national champions in the banking sector, confirming our first hypothesis. (iv) National or domestic mergers and acquisitions have been much more intense in the case of European Union new members, supporting the idea that the privatization process will enhance the M&A process. (v) In terms of the market concentration level, domestic M&As are less likely in highly concentrated environments. Cross-border ones have a much higher incidence, articulating the desire for visibility and representation on to the important markets. Our conclusions are conflicting, the higher the level of concentration the higher the possibility of belonging to one of the categories (see
Table 4).
The analysis of banking system and macroeconomic factors concluded on the fundamental influence of all of them in the decision of merging. However, the difference is highlighted by the level of influence in the way that the more efficiently a country is being governed, with a defined regulatory framework but has a high share of nonperforming loans, the investors will think twice. This is due to the low possibilities of delivering economies of scale, this objective being one of the main determinants of the orientation towards an emerging market. The level of financial freedom and bank consolidation will positively influence the chances of an M&A.
For a financial institution to be in a bidder position, it must be profitable, have a funding structure focused on deposits and other saving products, a size that allows it financial stability and sufficient funds channeled to investments and not the last a high level of liquidity. The share of impaired loans turned out to have a positive impact, possibly being the reason why that bank has been open to a restructuring operation in the first place. From the banking system and macroeconomic aspects, the degree of financial freedom, bank concentration, and the level of inflation enhance the probability of an M&A. The weaker the banking system, the dynamics of the M&A market will decrease. A bank will have more chances to be acquired if from an operational and financial point of view it shows a deterioration of the indicators, the conclusion being in line with the results of the literature (
Lanine and Vander Vennet 2007;
Hannan and Pilloff 2009;
Hernando et al. 2009;
Pasiouras et al. 2011). At the banking system- and macroeconomic-level, the efficiency of the regulatory framework and the share of nonperforming loans are negative and statistically significant, meaning that the financial institutions choose to partner with poorly regulated but high-performing regions.
The domestic versus cross-border analysis highlights the investors’ impulse to base their national restructuring strategy on weakly capitalized banks (equity/total assets), with liquidity issues (liquid assets/total deposits and borrowings), and with low lending activities captured by net loans/total assets. On the other side, the banks looking to expand into other markets will be well-capitalized but will have performance and liquidity problems. The results are also confirmed by the domestic indicators that come up as significant and negative like the government efficiency and regulatory framework. The level of inflation, financial freedom, and less stable banking systems will enhance the mergers and acquisition market.
4.3. Robustness Checks
To test the robustness of our findings, we employ two additional estimation techniques: Ordinary least squares (OLS) (
Table 5) and Probit (
Table 6).
The results maintain their robustness both in terms of significance and magnitude, confirming our previous findings.
1 Furthermore, we re-estimate Equation (1) by controlling for corporate tax avoidance. Thus, we investigate what factors drive M&A behavior conditional on the effective average tax rate (EATR) which is used in the literature as a proxy for tax avoidance (see e.g.,
Shams et al. 2021). EATR is computed using the Devereux–Griffith methodology (
Devereux and Griffith 2003). Corporate income taxation makes funding through debt issuance more attractive, because interest on debt is tax-deductible in most countries, whereas a return on equity is not (
Bremus et al. 2020).
Arulampalam et al. (
2019) argue that a higher tax rate in a country could enhance, reduce, or not affect the probability that its corporations are the subject of a cross-border acquisition.
The estimated results are exhibited in
Table 7. We can note higher effective average tax rates, which are associated with reduced tax avoidance practices, influence banks in a positive manner to be involved in an M&A process, findings that hold for targeted banks and domestic transactions. A possible explanation could lie in the fact that taxes on future profits of the existing corporation should already be capitalized into its value to existing shareholders and the acquirer might be able to increase its revenue stream and offset higher taxation through different practices, such as improved efficiency, greater knowledge or simply use of a brand name (
Arulampalam et al. 2019).
Thomsen and Watrin (
2018) document that tax avoidance in European Union firms has, on average, decreased over time. We also document that corporate taxation does not explain cross-border mergers and acquisitions, results that are in line with those of
Emter et al. (
2019) on cross-border banking developments.
4.4. Further Analysis
The last part of our study is focused on the separation of the period before and after the 2008 global financial crisis in order to capture any change in the typology of financial institutions and investors’ behavior (
Table 8 and
Table 9, respectively). At a first analysis of the dataset, between 2009 and 2018 there was a decrease of 22% in the number of M&As, from 122 to only 95. This has also influenced the number of observations, during 2000–2008 we identified 1323 instances compared with 2009–2018 where we had 2606 instances. The first conclusion that can be reached is that the dynamics of the M&A market were negatively affected by the economic crash, a trend that was also confirmed by the global developments. Nonetheless, a number of changes have been identified by
Rao-Nicholson and Salaber (
2016) which have concluded over an increased interest in cross-border transactions including the emerging markets from 3.6% before 2008 to 18.6% in the following period. Moreover, the amounts involved in operations between different emerging markets increased from EUR 6.8 billion to EUR 17.5 billion in the post-crisis period, confirming once again their importance.
Analyzing the differences between national versus cross-border M&As before (
Table 8) and after the global financial crisis (
Table 9), the general remark is that investors turned to banks with healthy indicators of profitability and liquidity during 2009–2018, compared to the previous period where they looked for entities with operational issues or credit risk. In other words, before the financial crisis, a bank was more likely to be acquired in a domestic transaction if it was poorly capitalized, have liquidity problems, and a high share of impaired loans. After the manifestation of the financial crisis, the same bank had to keep its liquidity, capitalization, and credit risk issues, but this time size and funding structure turn out to positively influence the probability of a bank being involved in a domestic M&A transaction. Looking at the macroeconomic indicators, government effectiveness is not an important driver after the 2008 meltdown, whereas inflation and GDP per capita manifest a positive and statistically significant impact.
Considering the cross-border M&As, there is a significant difference between the pre- and post-financial crisis periods. Until 2008, the most important attributes were the size of the bank, the low share of impaired loans, and a low interbank interest rate, which can be translated into an inefficiency of the national banking system but an efficient balance sheet. After 2008, these attributes changed the size, capitalization, low performance captured by ROAE, liquidity, and a significant volume of deposits as a share of total assets. In conclusion, after the financial crisis, the restructuring decision was much more thorough and studied, being materialized only when the acquiring bank was capable both operationally and financially. At the macroeconomic level, the indicators that increased the possibility of involvement in a cross-border M&A remained almost unchanged, with financial freedom and the regulatory framework having a significant influence. Regarding the economic development, if before the financial crisis a high level of GDP per capita was directly proportional to the orientation towards other markets, in the following period the direction was the opposite, meaning that investors no longer felt comfortable with this approach.
When it comes to target versus acquirer, it can be noted that the investors are looking for stability and lower associated risks in the aftermath of the global financial crisis. If before the outbreak of the financial crisis the attributes that increased the chances of an entity initiating a bid were size, the level of capitalization, and liquidity, after 2008 it was necessary for the targeted bank to record a positive ROAE, together with a balanced structure of deposits in relation to loans. Analyzing the national particularities, after the financial crisis most of them did not turn out to be statistically significant, the rigorous regulatory framework tilting the balance towards the bidder instead of the targeted bank. On the same note between 2009 and 2018, the higher the level of nonperforming loans, the lower the chance for that bank to be targeted.
If we consider only the instance of the bank being merged or not, the differences between the two periods do not differ significantly. The size of the bank and the weak capitalization will increase the likelihood of a merger before crisis, whereas after 2008 the share of impaired loans plays an important role. Nonetheless, these results may also be due to the deterioration of indicators in general as a result of the economic meltdown. From a national perspective before 2008, the countries with high government effectiveness and financial freedom and low levels of GDP per capita had higher dynamics of the M&A market. After 2008, the investors have been focused only on the level of inflation.