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WHAT ARE THE ADVANTAGES AND DISADVANTAGES THAT LEAD BANKS INTO MERGERS
AND ACQUISITIONS? IS ALTMAN’S Z-SCORE MODEL FOR BANKRUPTCY MOTIVATE BANKS
FOR MERGERS AND ACQUISITIONS? EVIDENCE FROM THE GREEK BANKING SYSTEM.
GEORGIOS KYRIAZOPOULOS1 - DR. DIMITRIOS PETROPOULOS2
ABSTRACT
The present work attempts to single out the advantages and disadvantages of banks that result from mergers and acquisitions. Also
the paper try to present the causes and the incentives that motivate banks to merge and mentions the probable surplus values that arise
the day after.
Based on the Altman‘s Z-Score Model in this paper we studied the two large mergers and acquisitions in the Greek Banking Market.
We examined the acquisition of Ergasias Bank from EfgEurobank that took place in 2000 and the merger between Marfin Bank and
Egnatia bank that took place in 2007. We tried to find out if the above merger and acquisition had improved the financial position of
the new banks according to the Altman‘s Z-Score Model. We also analyze a sample of the largest Greek bank with the Altman‘s ZScore Model between 1999-2009 that merged with or acquired other small Greek or Balkans banks.
JEL Classification Codes: G2, G21
Keywords: bank, mergers, acquisitions.
1
Section 1
Mergers and Acquisitions34
The developments in the international banking system during the last decade, in the framework of the globalization of the
economy, prompted significant changes in the money and capital markets with the most significant being the abandonment of the
restrictions in capital movements across borders and the unification of the financial markets. More specifically in the European
Union‘s domain, the banks are faced with a series of challenges and changes with the new facts brought about by the creation of the
Economic and Monetary Union (EMU) and the introduction of a new currency, the Euro. These changes have a particularly large
cost and create particularly intense competitive conditions.
These developments compel the banks to move forward with restructuring their entrepreneurial framework and reexamine their
strategy, taking advantage of the economies of scale and spectrum and the reduction of the operational cost.
The constant changes in the international financial environment gave a push to the advancement of the banking system. After the
establishment of the flexible exchange rates system the participation of banks in the exchange markets was enlarged. Along with the
increasing interdependence of the money markets the businesses started to explore the international money markets to finance big
investments for which the financing of the domestic market was insufficient.
As far as the Greek banking market is concerned special attention is paid to Retail Banking. This is supported by the fact that
most of the new banks that begin their operation in Greece have as a primary target the supply of Retail Banking services and much
later gradually they expand into Corporate Banking.
The supporters of mergers and buyouts argue that through them the size of banks increases, their production procedures are
rationalized and the sector is cleared from inefficient institutions, with the final result the improvement of profitability. The mergers
are considered a significant medium for the achievement of functional coordinated efforts for cost reduction. If economies of scale
exist, an increase of the bank size will not be followed by an equal percentage increase of the production cost. This phenomenon, in
all probability, could be attributed to the improved way of assigning projects, to the specialization, as well as to the differentiation of
risk as the size of loans increases.
The conservatives argue that through buyouts and mergers the control of the market and the monopoly power of banks are
strengthened, which results to higher prices for the banking products and services, for the customers of the new bigger banks.
Besides, the buyouts and the mergers might have as a main goal not to improve the interests of the shareholders but those of the
management of the banks, which due to many reasons can obtain better and more secure salaries and privileges when the bank size
increases.
The prevalent trend, that exists, is the mergers and acquisitions for the creation of large financial groups, which will be able to
compete at an international level. The target is to acquire a strong capital structure, extensive networks, and the capability to offer a
package of products at very attractive prices.
The value of a bank according to Union Eyroptenne des Experts Comptables Economiques et Financitre (U.E.C.) could be
represented by the following relation:
Bank Value = Present Value of all cash flows that will be collected by the buyer + Present value of the bank liquidation
result
(1)
The total value of a merge defined from the present value of the bank that make the acquisition plus the present value of the bank
target plus the synergistic effects that is the profits and benefits that occurred from the merge. So we can assume that the value of a
merge is defined from the above equation:
PVa+t = PVa + PVt + PVs
(2)5
1
Professor of Financial Applications of the Financial Department of the Technological Educational Institution of Western Macedonia
kyriazopoulosg@yahoo.com
2
Assistant Professor of the Technological Educational Institution of Kalamata dpetro@praxi.net.gr
3
Sakellis,E.I. (2001), pp. 185
4
Kyriazopoulos,G. (2002) pp. 54-56
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PVa = Present Value of cash flows of the bank that make the acquisition
PVt = Present Value of cash flows of the bank target
PVs = additional cash flows that derive from synergistic effects
PVa+t = sum total of the above three present values.
1.1
Definitions of Mergers and Acquisitions
One of the wonders of the Greek market is that the merger and sometimes simply the rumors of the upcoming merger will result
to an increased stock price at the Athens Stock Exchange, for the stocks of the banks that are involved in the merger. This happens
because the mergers are considered to be invigorating or a panacea which affects drastically the operation of a bank, but this is not
always the case. The results of the combined activities of two or more banks do not always produce the theoretical profits and the
surplus value that could be expected and the banks were looking forward to.
The target of mergers is the creation of added value in the new entity. The mathematical relation of a good merger implies that
one and one should add up to make three, in other words the creation of value that is greater than the sum of the values of the
businesses involved. This happens because in the case that one and one add up to two, would simply be a case of adding up of
expectations and of summations, but not the achievement of desired result, leading in some instances to the creation of negative
results as well.
The relative law 2190/1920, article 68, section 1 generally anticipates for public companies the following three ways of mergers:
(a) by the buying out of one by another
(b) by the absorption of one by another and,
(c) by the creation of a new entity (for banks Law 2292)
(a) Acquisitions have to do with the transfer of the whole or part of the ownership of a company (company being bought) to
another (company that buys out), which pays the agreed on price. The transfer usually takes place with the payment of cash or with
buying and exchanging shares, through the Stock Exchange. In many cases, even the acquisition of a minority interest of a bank it is
possible to secure for the buying bank real control, if with the transfer is in a position to affect critical choices of the management and
the strategy of the bank being bought or if the rest of the shares of the particular bank are held by many different owners. The
buyouts are grouped and evaluated usually according to the following criteria:
(a) Type of bank being bought out If the bank being bought out belongs to the public sector and is bought out by a private
bank; we have, at the same time with the buying out, the so called privatization.
(b) Origin of the buying bank The buying bank could be foreign, multinational or having its headquarters in another country
or a domestic bank
(c) Economic and business targets of the buying out bank Such targets might be
 Defensive or offensive effort for adjusting to competition
 Size increase for functioning more efficiently
 Absorption of competitors
 Reinforcement of its position in the market
 Utilizing on the supplementarity of activities
 Perspective of merging and of holistic development
 Coordinated activity development under the form of a group of companies
 Development and reselling the bought out company at a profit
 Selective downgrading or closing down the bought out company
 Entrance into a new market/country, or region
 Differentiation of products – services, etc.
(b) Absorption takes place when a big bank undertakes the whole or part of the assets and the liabilities of another smaller bank.
The procedure of the absorption takes place with the following three steps:
(a) settlement of the bank X which is absorbed
(b) increase of the capital of bank Y that absorbs X. the purpose of this capital increase is to reward the contributions that
were made from the absorbed bank X
(c) The shares of bank X are exchanged with shares of bank Y according to an agreed on ratio. If the value that was allotted
to the new shares is higher than the value of the old shares, the difference will be paid by the shareholders of the old
bank. In the opposite case, bank Y will return the difference.
(c) A merger takes place when two or more banks disappear in order to give their place to a new bank. It is, therefore, the
unification of two or more banks into one new bank. A merger takes place when a bank or a company more generally, buys out
another one – or more than one – and absorbs it into one unified operational structure, usually maintaining the original corporate
identity of the buying out bank. In essence, the merger is expressed by the following two steps:
1. Settlement of all banks that are merged
2. Exchange of shares of the old banks with shares of the new bank
The way and the form of uniting the two banks depend on the following three factors:
(a) the appraisal of the property each one‘s of the engaged banks
(b) The legal problems that arise. The legal advisors of all engaged banks should participate in the forming of the unification
agreement, in order to be secured that all shareholders of the engaged banks will receive fair and impartial treatment.
(c) The accounting depiction of the uniting procedure.
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Groppelli,A.A. Nikbakht,e. (1995), pp 445
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(d) The mergers correspond to different forms of business integration. Therefore, business integration could be vertical,
horizontal or a combination of heterogeneous business activities, the so called conglomerates:
 Vertical integration refers to mergers of banks and generally businesses which cover different but supplementary stages
of the production procedure( e.g., pumping, distilling and distribution of oil) as well as businesses which belong to
succeeding stages of the whole circuit of production and distribution of goods or services merge or form alliances in
various ways, in order to overcome serious disadvantages which result from the apportionment of projects, e.g.,
concentration of cotton mill – spinning mill – textile factory – ready to wear clothing factory, or banks – stockbroker
companies – insurance companies – exchange bureaus. Vertical integration therefore is the buying out of a customer or a
supplier or a partner.
 Horizontal integration refers to mergers of banks and generally of businesses of the same sector or employment of
relative objects, which cover the same or relevant phases of the production chain. It is the merger between businesses of
the same sector. For instance, the bank sector where The Chase Manhattan was the outcome of the merger of the Chase
National and the Bank of Manhattan in 1955. They form alliances in various ways in order to defuse the competition
among them and to assert themselves, if possible, by forming a monopoly in the market.
 Supplementary concentration6 is when businesses presenting no similarities or production dependency, the activities of
which however supplement one another, form an alliance. For instance, a business in the hospitality industry forms an
alliance with a bank or with a transportation company for the transportation of tourists, or with an entertainment business
for their entertainment or with a travel agency business.
 Finally, the merger of group type (conglomerate merger), is the merger of two businesses in irrelevant between them
sectors. The conglomerates cover non-related activities of businesses from different sectors under one unifying
organizational structure. This is also called diagonal concentration because an alliance is formed by businesses with
completely different products, technology, and customers. The diagonal concentrations, depending on the purpose for
which they are formed, are distinguished into the following two categories:
1. Conglomerate Market Extension, when the businesses that form the alliance have as a purpose to extend their market
share.
2. Conglomerate Product Extension, when the businesses that form the alliance try to extend the product they produce or to
completely differentiate their production, in order not to lose their influence in the market.
One buyout does not always lead to the merger of the bank that buys with the bank being bought out. Banking practice shows
that if the buyout of one bank, its integration and its coordination in the framework of a larger group is already a compound
undertaking, the merger with the buying out bank or additionally with other subsidiaries of the bank is an even more difficult task,
which hardly ever brings about the expected gains, at least in the short term.
Materializing the merger could take different forms in practice. It could be instant or gradual, total or selective, leading
correspondingly to a total or partial union of business units, premises, services, with the reselling or closing down of others, etc. The
procedure of functional merging, being it total or partial, does not necessarily coincides with the formal- legal procedure of its
integration. Thus, its various consequences, especially those which affect the employment and the labor relations, could make their
appearance before, during or, in some cases, much more lately than the time of a merger‘s formal integration. This is a matter of
special importance for the regulation and protection of the corresponding labor rights.
Usually the combination of a buyout with merger depends on:
 the strategy and the targets of the buying out bank
 the object and some specific characteristics of the bank being bought out (relevant business activity, supplementary of
functions, compatibility of cultural, administrative and labor characteristics , the pre-existing corporate culture)
 The general, socioeconomic conditions in the country and internationally.
 At any rate, the existing experience on mergers brings to prominence their difficulty and identifies among the most
important conditions of their success:
 the careful and detailed planning of buyouts and mergers
 The importance of the factor ―Human Resources‖ and especially the importance of its successful incorporation into the
new, unified operational and administrative framework.
1.2
Types of Bank Coalitions7
The concentrations of banks are distinguished in obscure (secret – informal) and visible (formal).
Obscure (or secret) concentrations are business alliances which are created de facto, when a small number of banks and generally
of enterprises controls the main volume of the production of a particular good or the production of basic raw materials, or it has the
greatest percentage of the specialized labor force that is occupied in the particular sector or finally a combination of all the previous
cases. Business collaborations of temporary and loose commitment usually belong to this category, such as the so called gentleman
agreements, consortiums, concern rings, etc.
Visible are those concentrations which become known to the outside and are one of the known types of concentrations, namely,
cartels, concerns, trusts, etc. The mergers and acquisitions of businesses are types of visible concentrations and in fact of the most
concrete form.
6
7
Sakellis,E.I. (2001) pp. 185
Sakellis,E.I. (2001), pp. 186
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2
Section 2 Advantages, Disadvantages and Risks of Mergers and Acquisitions
The Economic and Monetary Union (EMU) intensifies the competition between banks, strengthens their internationalization,
minimizes their profitability, and leads to the reduction of surplus personnel and the expensive network of their branches. Therefore,
the creation of strong financial groups with the purpose of achieving economies of scale and spectrum is the strategic target. The
buyouts and the mergers are the medium for the achievement of this target having at the same time the aim, if that is possible, to
increase their market share in the domestic and international market.
However, this phenomenon is not attributed only to the numismatic integration in part of Europe. It existed before and it is
developing very quickly and outside the zone of the euro in countries like the USA, Canada, some countries in Asia as well as the
rest of Europe.
Advantages89
2.1
One of the first issues which deserves particular attention in a proposed banking merger is to be determined the incitement for the
suggested union. The fact that the merger will result in a bank larger than what each individual bank was before the occurred merging
is not a strong reason per se for the merger to take place. In order for a merger to be justified there should definitely be predetermined
and specialized targets.
To sum up, we could name the following advantages that lead to the buyout and the merging of banks:
i.
Economies of scale and of purpose
ii.
Tax benefits
iii.
Replacement of inefficient, in the wide competitive environment, in specialized issues management and confrontation of
the increased competition
iv.
Reduction of risk using new techniques of managing financial risk
v.
The exploitation of the comparative advantage and the acquisition of oligopoly power
vi.
Maximization of shareholders‘ return
vii.
Infiltration into new markets and their exploitation more easily
viii.
Creation of a new commercial logo and the supply of products and services at a competitive cost and high added value
ix.
More efficient confrontation of the phenomenon of disintermediation
In more detail, the advantages that result from the mergers and acquisitions of banks are the following:
 The maximization of shareholders value. The buyouts and the mergers add a dynamic to the new financial group which
acquires the confidence of the investors and secures the rise of its stock price. This is even bigger if an increase in share
capital will follow. These expectations take effect in the short term. Constant and long term rise of the share price will be
observed if the group expands its profits in the following years.
 Confrontation of the increased competition on the condition that the group will offer new and differentiated products of
high quality and at attractive prices, that is to say, with a lower commission and at a lower interest rate. All these on the
condition that the operational cost and especially the expenses for personnel salaries will be lowered. The cost savings
could climb to 15% (Western Europe and U.S.A. Sources: Rhoades Stephen A., 1985b, ―Mergers and Acquisitions by
Commercial Banks, 1960 – 1983; Clark, Jeffrey A., 1988, ―Economies of Scale and Scope of Depository Financial
Institutions‖) and in some cases where the markets in which the merged financial institutions operate are related, it could
rise to 25% (Balkans Source: South Eastern Europe and Mediterranean Emerging Market Economies Decade Studies
2000 – 2009 from the National Bank of Greece).
 The acquisition of oligopoly power increases the profits of the credit institutions. The banks maintain or increase the
margin of the interest rates of deposits and loans in the retail banking market, while they cannot do the same in the
wholesale banking market where the customers have access to alternative sources of financing.
 The need for creating large financial institutions through buyouts and mergers is also required from the advances in
technology which increases the economies of scale in the production and distribution of financial services. The
introduction of new technology is, in most cases, expensive and thus, more affordable by the large groups. Phone
banking, internet banking, home banking, have all demonstrated greater economies of scale than the traditional banking
network based on branches.
 The new tools of the financial management of risk, like derivative products and the items which do not appear on the
balance sheet that provide collateral, can be applied in a more efficient way by financial institutions of a large size.
 The more efficient confrontment of the phenomenon of disintermediation, that is, the direct connection of depositors and
loan recipients outside the banking system. The banks create affiliate companies which can offer alternative financial
products beyond the traditional loan granting. The buyouts and mergers of the affiliates have the purpose to create new,
large and all-powerful subsidiaries with the purpose of the relevant reintermediation, that is, the offering from the
beginning the whole spectrum of services through banking groups.
One of the most important advantages of the creation of compound financial groups is the increase of efficiency of the financial
system. This increase could be attributed to two reasons:
1. Due to the economies of scale and,
6
7
Frank,J.F. Modigllani,F. Michael,G.F., (1994), pp. 79
Karathanasis,G. (1999) pp.568
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2.
The participation of banks in the capital markets which increases the competition and this way lowers the commission
paid for undertaking the listing of shares to the Stock Exchange, for the commissions paid to brokers, just as more
generally the expenses of transactions.
The systems of the Banks of General Transactions (Universal Banks) that are created from buyouts and mergers are those which
achieve the economies of purpose, improving in this way the efficiency of the financial system. The economies of purpose are
achieved with various ways:
First, the banks of general transactions can combine the needs of their customers, who already receive financing by them or are
depositors, for issuing or buying titles, much more easily and efficiently in comparison with investment enterprises.
Secondly, the offer of services can be done in a more efficient way through the extensive distribution networks of the banks.
Thirdly, because the returns of banking services and the revenues from work done on titles exhibit negative correlation, arises the
capability of differentiating the portfolio and consequently of lowering the amount of risk of general banking transactions. The most
important, though, advantage of universal banks lies in their flexibility to adapt to the changing conditions of the market. Especially,
it should be pointed out the strong comparative advantage that the banks of general transactions have (Universal Banks), namely, in
the «securitization» of their revenues.
2.2
Disadvantages1011
The possible difficulties, that should be weighed and examined properly, counterbalance sometimes the strong advantages, which
result from one merger. Some of the possible disadvantages are:
1. The difficulties that arise for the personnel of the merged banks to get acquainted with the new fellow workers, the new
policies and the new procedures.
2. Jealousies and internal competition as well as frictions that often take place among the staff members of the merged
banks.
3. There is a possibility that the reduction of the personnel and equipment as a result of the merger will be damaging.
4. The problems of branches and other facilities that might not be needed after the merger and could not be leased or sold.
5. In some instances of mergers there will be required, new logos, new writing material, new forms or publications etc., and
thus new stocks for expendable supplies and equipment items that already exist at an additional cost.
6. The uncertainty with regards to the approval of the merger by the proper authorities (the Bank of Greece and the
Committee for Competition in Greece)
7. The uncertainty as to the amount of the merged banks activities that will be retained after the merger and the uncertainty
as to what degree some substantial part of a desired activity of any participating in the merger bank will be lost as a byproduct of the merger
8. The possibility that the bank that will be created after the merger will have surplus personnel in some departments or
positions. For example, it is possible to take place a necessary doubling of specialists in matters of foreign exchange
markets, in matters of personnel training etc.
9. A possible overoptimistic projection for the size of profitability that will result from the combination of operations of the
merged banks will have as a result the buying bank to pay an exorbitant price for the bank being bought out.
10. In many cases, the returns of the share of the banks that made buyouts of other banks was lower than the return of the
sector as a whole,
11. The shareholders of the bank that made the buyout profit while the shareholders of the bank which was bought out lose
12. If the domestic market is fully integrated and competitive, there is not much room for acquiring a bigger share of the
market and that on the condition that the products being offered are differentiated by high quality and technology.
13. The cost reductions that are achieved through the economies of scale and spectrum and the synergies are a one-time
reduction.
14. There arise considerable difficulties of adjustment such as the unification of the different corporate cultures of the banks,
of the different salary scales, of the subsidies and benefits and of the different ways of promotions.
15. High social cost because it is usually observed a reduction in employment resulting from lying off personnel.
16. However, from the moment that it will be decided that the advantages of the proposed merger obviously exceed the
possible disadvantages, the terms of the merger need to be prepared. The financial terms of the proposed agreement will
be in most cases, the factor that will count the most, given that the proposal will receive the approval of the stockholders
of the corresponding institutions. Along with the financial terms of the proposal, some other matters that could present
difficulties are:
1. Who is going to be the Chief Executive Officer of the merged banks, which will be the relevant hierarchical order and
what will be the salary of the other executives.
2. Who are going to comprise the Board of Directors of the merged banks?
3. If the policies of the banks planning to merge are not identical or similar, what policies will be followed in the new bank
4. Will all the executives and the rest of the personnel of the banks planning to merge maintain their position regardless of
whether they are really needed and if yes, for how much longer
5. How will the additional benefits, possible programs of voluntary early retirement, programs of profit sharing, life group
insurance, etc. be equalized
8
9
Filios,B.F. (1994), pp.206-207.
Yeager,C.F. Neil,E.S. (1995), pp. 308
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6.
2.3
How differences in the salary scales are going to be reconciled. Usually the salaries and the additional benefits should be
increased at the level of the bank with the highest benefits. Such an example is the remuneration differences between the
personnel of the Mortgage Bank and the National Bank. The remuneration of the staff of the Mortgage Bank were and
continued to be higher than that of the staff of the latter bank even though the former‘s buyout had been completed since
1996.
Risks of Mergers and Acquisitions
The buyout of banks and enterprises can generally be done either with cash payment or with the issue of new shares. In the
second case, the buyout will occur upon the issue of the new shares. The new companies will replace the shares which were issued by
the company being bought out. Therefore, the risks that arise from buyouts and mergers are distinguished:
 In the ones that exist before the buyout and have to do mainly with the pricing of the bank which is being bought out,
since the value of the buyout should be counterbalanced by the value of the projected revenues that will follow and,
 In the ones that exist after the merger or the buyout, with the major risk being the possible organizational and labour
heterogeneity of the merged banks.
At the same time, the operational and strategic risks can be significant, as the management of the bank which buys out another
one is possible not to have complete knowledge of the particular features of the market, the regulatory framework and the standards
there are followed in the country where the company being bought out is located. Finally, in the merger of two financial institutions
which operate in the same country, with approximately the same line of production of supplied services, the problems could arise
from:
 The incorporation of personnel into the new bank
 The unification of the information technology systems
 The redesigning or the extension of the internal control systems
 The daily monitoring of the accounting systems
 The new way of approaching and communicating with the clientele.
Section 3 Economic Utility of a Merger12
3
Some analysts calculate the value of a bank by predicting the future cash flows (and not the accounting flows) that will result
from the flows of the two separate banks. Many mergers seem to be profitable because of the different margins of profit and flows of
cash which will result from the merger of the two banks.
Moreover, one bank should be sold because it is not profitable (e.g. the Bank of Crete). The question is why someone would want
to buy a bank that is not profitable. The buyout will take place only when a surplus will be created, which cannot occur at the phase
during which the non-profitable bank operates by itself.
The real surplus, of course, is created only with the utilization of one comparative advantage that nobody else can copy without
incurring a high cost, which makes copying unprofitable. In the case of the buyout of the Bank of Crete from Eurobank the latter
found itself with an extensive network of operating branches all over Greece without having to undertake the high cost of
establishing new branches.
Factors of Surplus Value
3.1
1.
2.
3.
4.
5.

12
Economies of Size: The economies of size are the basic reason for «horizontal» buyouts, even though such economies
are used as an argument for mergers of the conglomerate type. The capability of advancing more banking products
through the same network of distribution, utilizing the same executives of the central administration, the same treasury
department, the same program of training and developing executives, as well as the same corporate identity are some
basic arguments in support of the economies of size that arise from the buyouts and mergers. However, there are also
some factors which may delay the utilization of economical magnitudes. Such factors are the culture of each bank, the
different computerization system and the labour legislation, when it is about a cross-border buyout or merger.
Economies of Verticalization: One bank has suppliers (of technological equipment, of capital, of consulting services,
etc.). Thus, the National Bank chose to buy out 35% of Planet Consulting, a company which undertook the restructuring
of the bank in 1998, with the purpose of listing the shares of the National Bank of Greece in the New York Stock
Exchange and to acquire I.S.O.
Combination of Supplementary Resources: Many small banks have specialized in one sector, e.g. investment banks, like
the National Bank of Industrial Development which has specialized in Corporate Banking, while others such as the Nova
Bank specialize in Retail Banking. The acquisition of a bank with a numerically large network of branches in Greece but
average products from another bank could be more profitable than the creation from the beginning of such a network.
Such an example constitutes the buyout of the Bank of Crete, which had in possession a relatively large number of
branches compared to Eurobank, which had in possession a small number of branches.
Use of Untaxed Reserve Funds: It is possible for a bank to have created untaxed reserve funds, which is not in a position
to utilize because of insufficient profits. Another bank with significant profits can take advantage from the consolidation
of these reserve funds in its balance sheet, if that is allowed by the relative legislation.
Use of Cash Holdings: Many banks are in the position of having high cash holdings without having investment plans
with a high rate of return. In this case, they have the following choices:
To distribute this cash to their shareholders in the form of an extra dividend
Kyriazopoulos,G. (2002) pp.61-63
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
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7.
8.
3.2
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To buy back shares of the company
To make the bank larger by buying out another, mainly financial, institutions.
Neutralizing Inadequacies: Many banks hold the belief that they are in the position of saving other faltering banks, as
lately happened with the buying out of banks in Bulgaria, FYROM and Romania from Greek banks. The future will
show the rightness of these buyouts. In countries where money markets have depth like the U.S.A. market, the threat of a
hostile buyout forces executives to maximize the return of the bank they manage.
Diversification: An investor has an interest to invest in a large and strong banking complex rather than in every small
bank separately from the ones that comprise the banking group. This is mainly due to the lack of knowledge from the
side of the investors.
Lower Costs of Financing: When two banks or more banks merge with the purpose of creating an all powerful banking
group, the risk of the depositors and investors for bankruptcy is lowered. Consequently, the interest rate they provide to
their depositors gets lower in a competitive however environment.
Economical costs of an acquire or a merger:
The cost of buying out bank X from bank Y is the price that Y will pay less the value of X as it has been estimated according to
the agreed on act of buying out. The payment of the price of the buyout could be made:
 With cash holdings
 With an offer of shares of Y in exchange for the shares of X
 With a combination of the two above cases
The buyout with cash gives back to the shareholder of X a secure amount of cash that could be invested anywhere they wish. If
afterwards it turns out that Y overestimated the value of X, the former shareholders of X are not affected at all.
In the case of payment with shares, the shareholders of X participate in the risk and will be affected by the lowering of the value
of the shares in addition to the one of the Y that they hold after the buyout, if it turns out later that the value of bank X was
overestimated.
3.3
Quantitative Factors of Mergers and Acquisitions
Acquisitions play an important role not only in the development of banks, but generally of all enterprises. The financial
executives that are responsible ought to be in the position to evaluate a possible merger and to participate in the evaluation of the
corresponding firms that are taking part in it. The most important term that someone negotiates in a buyout agreement is the price that
a bank will pay for the other. The quantitative factors which exert the most significant influence on the terms of a buyout agreement
are:
 The current profits
 The current market prices of the shares
 The accounting values
 The net working capital
It is possible however, that other factors could exist that can not be expressed quantitatively that create conditions of synergy (two
and two equals five), to such a degree, that the payment of a price larger than the one the existence of the quantitative factors could
justify.
The price of a company share reflects the expectations about future earnings and dividends that is why the current market values
it is obvious that exert a strong influence on the terms of mergers. It is though possible the price at which an enterprise is bought out
to be higher than its current market price, that has been determined in the market before the announcement of the merger mainly for
the following reasons:
1) If the banking sector is depressed, the bank‘s shareholders are possible to exaggerate in their estimations of the
unfavorable prospects of the bank. This has as a result the price of its shares to be formed at a low level.
2) The hopeful buyer can be interested in the particular bank, because of its contribution to his bank. Thus, the buyer it is
possible to have reasons that make him estimate the value of the bank that wants to buy out higher than the stock market.
3) The buyer offers to the shareholders a price higher than the current market price as an incentive for them to sell their
shares.
4
Section 4 Reasons and Incentives of Mergers and Acquisitions
In the last years the abolition of a series of restrictions in the framework of the globalization, that had to do with the financial
system, mainly in countries with advanced economies, created the necessary conditions for the operation of composite financial
groups headed by banking institutions. During the last two decades the banking system has significantly advanced internationally.
The role of banks, their structure and their function, the services they provide have all changed due to the dramatic developments in
the international economic domain.
The need for more capital, in order for the banks to be able to respond to the new conditions, the pressure of the shareholders,
which in many cases are investment institutions, for higher profits, as well as the need for the creation of economies of scale for
keeping up with the competition from inside and outside of the ―walls‖, has led the banking sector in a snowball of acquisitions and
mergers.
4.1
Reasons of mergers and acquisitions
The main reason of an acquisition or/and of a merger is the maximization of the share value of the financial institution either
through the increase of its oligopoly power in the market, or through the increase of its efficiency. Experience shows that particular
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buyouts and mergers, especially the ones that take place in the same market (in –market); occur with the purpose to increase their
oligopoly power. In these cases consequently, the banks increase the margin between granting of loans and deposits in the retail
market, while it is not possible to do the same in the wholesale market, where the customers have alternative solutions. The increase
of the oligopoly power increases their profits and the value of their stock, but against the welfare of the society.
Research also shows that for a significant percentage of mergers and acquisitions the buyer is of a large size with a high
efficiency as far as cost and profits are concerned, while the one being bought out is of a smaller size and at the same time less
efficient.
Therefore, a significant driving force for most mergers and acquisitions is the diffusion of the experience of the buyer who is
large and efficient, of its procedures and policies, as well as its culture. More over, the efficiency is possible to be increased and
because of the dispersion of the risk.
Hypotheses13 that assume that the acquirer wishes to increase shareholder wealth are consistent with wealth-maximizing behavior.
Shareholder wealth will increase as a result of an acquisition only if (a) the future cash-flow stream generated by the combination
exceeds the sum of the future cash-flow streams of the two individual firms, and/or (b) the risk to the merged firms is reduced.
Note, first, that the future cash-flow stream generated by the merged firms will exceed the sum of the future cash-flow streams of
the two individual firms if:
(1) The acquirer has privileged information indicating that the target firm is undervalued. If the acquirer can purchase the
target for less than its true value, then the shareholders of the acquiring firm will benefit from the merger. This
acquisition motive is known as the information hypothesis.
(2) The acquirer can raise the price of its product after the merger. This would be possible if the acquirer succeeds in
reducing price competition in the product market by acquiring some of its competitors. This acquisition motive is known
as the market power hypothesis.
(3) The acquirer can reduce the cost of its product after the merger. This would be possible if the merger generates synergies
via economies of scale and scope, reduced distribution and marketing costs, divestiture of redundant assets, etc... This
acquisition motive is known as the synergy hypothesis.
(4) The acquirer can reduce the tax liability of the combined firms below their aggregate non-merged tax liabilities. This can
be considered an extension of the "synergy hypothesis". However, it is "financial" synergy rather than cost-reducing
synergy. It is known as the tax hypothesis.
(5) The acquirer removes inefficient management from the target firm and improves the performance of that firm. This
acquisition motive is known as the inefficient-management hypothesis.
4.2
Incentives of bank mergers and acquisitions14
The principal incentives that push the banking enterprises to concentration with buyout and merger are the following:
(i) The incentive of the rational organization and the expansion of banks: The merged banks probably expect the expansion of
their activities with the entrance in new domestic or international markets, new sources supplies of raw and other materials and new
ways of making available their products. The conquest of new markets is possible to have the purpose of lowering the cost of
production, with the allocation of general expenses to a greater volume of production. It is still possible the merged banks to have as
a purpose the diversification, which is the expansion of their entrepreneurial activities into profitable product categories or the
verticalization of their production circuit. In addition, the absorption of a bank by one that operates successfully offers to the bank
that is being absorbed successful management, experienced and specialized personnel, dependable suppliers, state of the art
technological equipment and one wide network of branches. More over the absorbing bank‘s management can plan its activity on the
base of the past history of the absorbed bank, without any significant risks, since the absorption does not create additional
competition. Furthermore, it could be noted that a lot of bank mergers take place in order the merged banks to take advantage of tax
benefits, such as the calculation of depreciations of the fixed assets at their current market value, the listing of the shares of the
absorbing or the one being absorbed in the stock exchange. Regardless of the above obvious advantages, it can be shown that the
merger is not always the most appropriate way for bank expansion. The quick expansion of banks that is achieved through their
merging could lead to an inadequate management that could fail to maintain a satisfactory financial position especially in periods of
economic depression.
(ii) The defensive incentive: The buying out bank aspires to make stronger its position in the market, so that to discourage a
possible buyout from some other competitive bank.
(iii) The offensive incentive: The bank moves forward to buy another bank before it becomes a potential competitor and thus
avoids its strengthening in the market.
(iv) The profiteering incentive: One bank buys out another bank, with the purpose to sale it at later time to somebody else at a
higher price.
In relation to the general economic environment, the buyouts and the mergers it looks like that they correspond to a confirmed
trend of the market for creating strong bank groups capable:
 To correspond to the present conditions of a globalised economy, to the international competition and to the
continuously intensifying international currency turbulences and pressures, inside and outside of the European Monetary
Union (EMU) domain.
 To improve the utilization of the total operational and human resources potential, with the purpose to maintain – expand
the market shares, the efficient promotion of new products, the better customer service, the improvement of strategic
functions, the revitalization and strengthening of their capital base.
13
14
Hawawini,A.G. Swary,I. (1990) pp.24
Sakellis, E.I. (2001), pp. 188-189
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To take advantage of new technologies of gathering, of managing and of diffusing information, that favors and imposes
the restructuring, the integration and the networking to the international environment.
To take advantage of the synergies that ought to develop in the framework of modern business institutions, eliminating
bureaucratic inflexibilities of business organizations of large size.
Altman’s Z-Score Model15
Altman‘s Z-Score Model is based on multivariate approach built on the values of both ratio-level and categorical univariate
measures. These Values are combined and weighted to produce a measure (a credit risk score) that best discriminates between firms
that fail and those that do not. Such a measure is possible because failing firms exhibit ratios and financial trends very different from
those of companies that are financially sound. In a bank16 utilizing such a model, loan applicants would either be rejected or
subjected to increase scrutiny if their scores fell below a critical benchmark. E. Altman after several studies and research arrived at
the following Z-Score Model:
Z= 0,717X1 + 0,847X2 + 3,107X3 + 0,420X4 + 0,998X5
(2)17
X1 = Working Capital / Total Assets
X2 = Retained Earnings / Total Assets
X3 = Earnings before Interest and Taxes / Total Assets
X4 = Market Value of Equity / Book Value of Total Liabilities
X5 = Sales / Total Assets
1) X1 = Working Capital /Total Assets : The working capital / total assets ratio, frequently found in studies of corporate problems,
is measure of a firm‘s net liquid assets relative to its total capitalization. Working capital is defined as the difference between current
assets and current liabilities. Liquidity and size characteristics are explicitly considered.
2) X2 = Retained Earnings / Total Assets: Retained earnings are the account which reports the total amount of reinvested earnings
and /or losses of a firm over its entire life. The age of a firm is implicitly considered in this ratio. A relatively young firm will
probably show a low X2 = Retained Earnings / Total Assets ratio because it has not had time to build up its cumulative profits.
3) X3 = Earnings before Interest and Taxes / Total Assets: This ratio is a measure of the productivity of the firm‘s assets,
independent of any tax or leverage factors. Since a firm‘s ultimate existence is based on the earning power of its assets, this ratio
appears to be particularly appropriate for studies dealing with corporate failure. Furthermore, insolvency occurs when a firm‘s total
liabilities exceed a fair valuation of its assets, as determined by the earning power of those assets.
4) X4 = Market Value of Equity / Book Value of Total Liabilities: Equity is measured by the combined market value of all shares
of stock, preferred and common, while liabilities include both current and long-term items. This ratio shows how much a firm‘s
assets can decline in value before its liabilities exceed its assets and it becomes insolvent. Altman suggested that capitalized leases,
both operating and financial, should be added to the firm‘s total liabilities.
5) X5 = Sales / Total Assets: The capital –turnover ratio is a standard financial ratio illustrating the sales generating ability of the
firm‘s assets. It is one measure of management‘s capacity to deal with competitive conditions. Based on the univariate statistical
significance measure, it would not have appeared at all in the model. However, because of its unique relationship to other variables in
the model, the sales/total assets ratio ranks second in its contribution to the overall discriminating ability of the model.
The Z-Score Model was constructed using multiple discriminant analysis, a multivariate technique that analyzes a set of variables
to maximize the between-group variance while minimizing the within-group variance. This is typically a sequential process in which
the analyst includes or excludes variables based on various statistical criteria. It should be noted that if the groups were not very
different at the univariate level, a multivariate model would not be able to add much discriminatory power. In order to arrive at a final
profile of variables, the following procedures were utilized:
1) Observation of the statistical significance various alternative functions, including determination of the relative contributions of
each independent variable.
2) Evaluation of correlations among the relevant variables
3) Observation of the predictive accuracy of the various profiles
4) Judgment of the analyst.
Based on the Altman‘s Z-Score Model we examined two large mergers and acquisitions in the Greek Banking System. We
examined the acquisition of Ergasias Bank from EfgEurobank and the merger between Marfin Bank and Egnatia bank. We tried to
find out if the above merger and acquisition had improved the financial position of the new banks according to the Altman‘s Z-Score
Model. The results showed at the Appendix area at the end of the paper.
Altman‘s Z-Score Model has the above three areas to study bankruptcy classification for firm: 18
Problem Area under 1,20 points
Gray Area between 1,20 points and 2,90 points
Healthy Area upper 2,90
6
Conclusions
The mergers and acquisitions usually contribute to the creation of big bank groups, in lifting of competition between the banks
that merge, in their revitalization, as well as to the lowering of costs with the final result the improvement of efficiency.
15
Altman, E.I. (1968)
Altman, E.I., and P. Narayanan. (1997)
17
Altman, E.I. and G. Sabato. (2007)
18
Altman, E. I., (1968), (2000), (2002)
16
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There are many surface-level reasons for a merger or acquisition, but they all come down to the desire of management to improve
the company's overall financial performance. Getting to that state of improved performance usually involves either internal (organic)
growth, external growth through mergers and acquisitions, or both.
The mergers and acquisitions of banks in small and open economies, that receive continuously more intensive pressure from the
international competition, are considered now necessary, so that these banks acquire that sufficient size and market share, in order to
secure their survival. Empirical research that took place at the level of European Union shows that the domestic bank mergers of
about the same size increase significantly the performance of the merged banks through the economies of scale and the synergies.
However, as a contradiction the critics of mergers and acquisitions argue that usually the mergers and acquisitions even though
they are considered a significant medium for the achievement of economies of scale the later take place only at the levels of
especially low return of the banking products. In other words the economies of scale seem to exist only at levels of low return with
diseconomies of scale at levels of high return. Moreover, there are not agreed on indications of universal spectrum economies. Yet,
there are only a few indications of spectrum economies per product in the production.
Altman‘s Z-Score Model helps firms to avoid the bankruptcy. We apply this model to the financial statements during the past
decade of the most important banks of Greece. Those banks were leading in mergers and acquisitions the decade 1999-2009 not only
in Greece, but also in the Balkan Banking Market. We observed that all Greek Banks during the whole decade 1999-2009 were
moved in the problem area according to the Altman‘s Z-Score Model. This happened because all Greek Banks had low Market Value
of Equity, but high Book Value of Total Liabilities. However the ratios, that influence the position of the Greek Banks in the
Altman‘s Z-Score, were mainly the Retained Earnings / Total Assets and the Earnings before Interest and Taxes / Total Assets. Those
ratios had minimum contribution to the final score of the Greek Banks in the Altman‘s Z-Score Model (see Appendix I-V). We
observe that the low score of the Greek Banks in the Altman‘s Z-Score Model was remained also after their mergers and acquisitions
with other small banks in Greece and in Balkan Area. Classic example is Efg Eurobank that is considered one of the most important
banks in Greece that acquired the Ergasias Bank and other Greek and Balkan Banks and had low score in the Altman‘s Z-Score
Model (see Appendix II).
At the end we should say that the big Greek Banks know the problem, so they had to lead in mergers and acquisitions to solve it.
Greek banks must remain at least three or four in the Greek Banking Market, so they will be competitive with the European Banks.
Also they will not have to fear for a future aggressive acquire from other U.S. or European Bank and because of the low market value
of their equity, or for the most unpleasant situation for them and the Greek Banking System, that is a bankruptcy.
7
References
Altman,E.I., (1968), ―Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy‖ Journal of Finance
23, no. 4:589-609
Altman,E.I., (2005), ―An Emerging Market Credit Scoring Model for Corporate Bonds‖ Emerging Markets Review 6, no. 4:311323
Altman, E.I., (July, 2000). "Predicting Financial Distress of Companies". Retrieved on September 4th, 2009 from
http://pages.stern.nyu.edu/~ealtman/Zscores.pdf: 15-22.
Altman, E.I., (September, 1968). "Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy". Journal
of Finance: 189–209.
Altman, E.I., (May, 2002). "Revisiting Credit Scoring Models in a Basel II Environment". Prepared for Credit Rating:
Methodologies, Rationale, and Default Risk, London Risk Books 2002.
Altman,E.I., Haldeman,R.G., and Narayanan,P., (1977) ―ZETA Analysis: A New Model to Identify Bankruptcy Risk of
Corporations‖ Journal of Banking and Finance 1, no. 1:29-54
Altman,E.I., and Narayanan,P., (1997), ―An International Survey of Business Failure Classification Models.‖ Financial Markets,
Institutions and Instruments 6, no. 2:1-57
Altman,E.I., and Sabato,G., (2007), ―Modeling Credit Risk for SMEs: Evidence from the U.S. Market‖ Abacus 19, no.6:716-723
Amihud,Y. – Lev,B. (1981), "Risk Reduction as a Managerial Motive for Conglomerate Merger", Bell Journal of Economics,
(Autumn), 605-617.
Amihud,Y. - Dodd,P. - Weinstein,M. (1986), ―Conglomerate Mergers, Managerial Motives and Stockholders Wealth", Journal of
Banking and Finance, 10: 401-410.
Eckbo,E.B. (1983), "Horizontal Mergers, Collusion, and Stockholder Wealth", Journal of Financial Economics, 11: (April), 241273.
Filios,B.F. (1994), The Financial of Banks Firms, Press: Interbooks Athens.
Frank,J.F. Modigllani,F. Michael,G.F., (1994), Foundations of Financial Markets and Institutions, Press: Prentice Hall pp. 79
Groppelli,A.A. Nikbakht,e. (1995), Finance 3rd Edition Press:Barron‘s Educational Series, Inc. N.Y.
Hawawini,A.G. Swary,I. (1990) Mergers and Acquisitions in the U.S. Banking Industry, Elsevier Science Publishers B.V.
Amsterdam The Netherlands.
Karathanasis,G. (1999), Financial Management and Financial Markets Press Benou,E. Athens.
Kyriazopoulos,G. (2002) Mergers and Acquisitions in the Banking System University of Macedonia
Mitsipoulos,Th.Gg. (1997), Modern Financial Markets and Products, Press: Ipirotiki Publications Αθήνα.
Rhoades,S.A. (1985) , ―Mergers and Acquisitions by Commercial Banks, 1960-1983‖, Washington, Federal Reserve System,
Staff Studies, No 142, (January).
Rhoades,S.A. (1986), ―Bank Operating Performance of Acquired Firms in Banking Before and After Acquisition‖, Washington
Federal Reserve System, Staff Studies, No 149, (May).
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Vrykous Athens
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Yeager,C.F. Neil,E.S. (1995), Financial Institutions Management, Press: Prentice Hall
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Appendix I
The merger between Marfin bank and Egnatia bank
The evolution of Z-Score of the new MarfinEgnatia Bank that turn up from merge between Marfin Bank and Egnatia Bank
M ARFIN EGNAT IA BANK
0,14
0,13
0,12
Z-Score Model
Problem Area < 1,20
Gray Area 1,20-2,90
Healty Area > 2,90
0,1
0,09
0,08
0,08
0,06
0,04
0,02
0
2006
2007
2008
Years
2009
2010
The evolution of Z-Score only the Egnatia Bank before the merge took place.
EGNATIA BANK
0,3
0,26
Z-Score Model
Problem Area <1,20
Gray Area 1,20-2,90
Healty Area >2,90
0,25
0,2
0,2
0,19
0,18
0,15
0,14
0,13
0,1
0,05
0
2000
2001
2002
2003
2004
2005
2006
2007
Years
9
Appendix II
The evolution of Z-Score of the Ergasias Bank before the acquisition took place.
0,6
Problem 0-1,20
Gray Area 1,20-2,90
Yealthy Area >2,90
Z-Score Model
0,5
0,49
0,4
0,38
0,36
0,3
0,2
0,1
0
1996
1997
1998
1999
2000
Years
The evolution of Z-Score of the Efg Eurobank Bank before the acquisition took place (years 1997-1999).
The evolution of Z-Score of the Efg Eurobank Bank after the acquisition took place (years 2000-2009).
EFG EUROBANK
0,5
0,45
0,43
Problem Area <1,20
Gray Area 1,20-2,90
Healthy Area >2,90
Z-SCORE MODEL
0,4
0,35
0,36
0,3
0,29
0,26
0,25
0,24
0,22
0,2
0,2
0,2
0,18
0,16
0,15
0,16
0,16
0,1
0,05
0
1997
1998
1999
2000
2001
2002
2003
2004
Y EARS
10
Appendix III
The evolution of Z-Score of the Piraeus Bank during the 2000-2009
2005
2006
2007
2008
2009
2010
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PIRAEUS BANK
0,35
Z-Score Model
Problem Area < 1,20
Gray Area 1,20-2,90
Healthy Area > 2,90
0,3
0,29
0,25
0,25
0,2
0,19
0,18
0,18
0,16
0,15
0,19
0,15
0,14
0,12
0,1
0,05
0
1999
11
2000
2001
2002
2003
2004
Years
2005
2006
2007
2008
2009
2010
Appendix IV
The evolution of Z-Score of Alpha Bank during the 2000-2009
ALPHA BANK
0,35
0,33
0,3
Z-Score Model
Problem Area < 1,20
Gray Area 1,20-2,90
Healthy Area > 2,90
0,25
0,23
0,2
0,2
0,19
0,17
0,16
0,15
0,14
0,17
0,14
0,12
0,1
0,05
0
1999
2001
2002
2003
2004
2005
Ye ars
2006
2007
2008
2009
2010
Appendix V
The evolution of Z-Score of National Bank of Greece during the 2000-2009
Z
Z-Score Model
NATIONAL BANK OF GREECE
0,3
0,25
Problem Area < 1,20
Gray Area 1,20- 2,90
Healthy Area > 2,90
12
2000
0,24
0,21
0,2
0,2
0,18
0,16
0,15
0,17
0,17
0,14
0,12
0,12
0,1
0,05
0
1999
2000
2001
2002
2003
2004
2005
Years
2006
2007
2008
2009
2010