RELATIONSHIP BETWEEN FINANCIAL CRISIS, EVENTS AND ANNOUNCEMENTS
Analysis on the Effects of the European Financial Crisis on M& A Returns
The current society is exposed to the news of financial crisis, and most companies strive to make ends meet, despite these news. The news on financial crisis is still very new fresh in the minds of European companies. Particular attention is geared towards culmination of financial crisis in Europe following the 2007 subprime crisis, which had begun in Europe but immediately became a global affair. This is one occasion that led to economic restructuring to avert any possible crisis, and to foster economic stability in Europe. The subprime crisis in Europe started with the fall of Lehman Brothers Bank, due to its nature of continuous borrowing. Therefore, the financial failures that rocked Europe becomes stepping stone for developing new policies that would amicably solve any future crisis. With the fall of Lehman Bank, the safety of banks was castigated, and his doubt transcended to more economic crisis ever witnessed in Europe. Saving in banks were reduced with the collapse of mega banks and in Europe; a condition that made banking sectors to become fluidly and unattractive. In a quick response, people developed much precaution and skeptical towards making savings with banks, but instead considered other avenues of saving. This is yet one financial crisis that will be evaluated in this research and in lieu with the M& A financial institutions in Europe. The situation that rocked Lehman Bank was not an isolated case of financial crisis, but extended overboard to capture other banks like Fannie Mae and Freddie Mac or Merrill Lynch. Another instance that marked a mega financial crisis refers to the collapse and bankruptcy of banks in Cyprus (Fahlenbrach, Prilmeier,& Stulz, 2012, p.2143). These are just a few events that marred the European economy amidst heighted financial operations in the financial institutions. With the collapse of strategic financial and economic sectors, the entire Europe was compelled to undertake massive restructuring program with the view of curtailing any possible threat to its economy. This is one point where the financial crisis attracts certain announcement into the European sector.
The research question finds its application where various sectors of the European economy had to undergo restructuring in order to comply with the change of economic atmosphere. As mentioned above, financial crisis is worst-case scenario that any economy would ever wish to face, but stringent measures must be instigated in the financial and economic landscape with the view of mitigating any future occurrence. M& A is part of the financial institutions that existed, before, during, and in the aftermath of European financial crisis. Therefore, their roles towards sustaining the economy are evaluated in lieu of the financial crisis that the continent underwent. The haphazard change in the financial landscape of Europe is largely attributed to the steps taken by different players. This is yet another causal effect that the research seeks to clarity. The heightened economic state in Europe sanctioned tremendous restructuring processes, which involves a contingent of technological and financial remedies. This crisis had attracted vested interest including the International Monetary Fund, which came in aid of this adverse situation. The pronouncement following financial crisis in Europe led to the reduction in the number of banks to 6.682. This is another element discussed by this research, as it seeks to enhance an understanding on the real cause on this trend. In addition, the roles played by M&A banks towards this incident are highly evaluated.
This study is primarily focused on the effects of M&A transactions on the financial sectors following the financial crisis that hit Europe. This aspect then brings us to the definition of research problems and various questions attainable to this it, and how it signified various operations in the European financial sectors. This study is done with respect to the increased number and magnitude of M&A’s in the financial sector following the European financial crisis. The financial interplay that was witnessed in Europe became dramatic and led to the generation of new financial models in line with the M&A financial transactions. Based on this, there was a possibility that an incentive was created for a larger number of bargains in the European market. This led to the introduction of acquirers who could gain huge financial advantage out of the M& A deals they obtained. At this point this research in intensively geared on evaluation the effects of financial crisis in Europe, and whether it offered larger potential gains to the M&A deals. This is the thesis of this research, and it intends to research extensively into the financial effects that M&A deals had to the economic and financial landscape of Europe.
Problem Statement and Research Questions
From the foregoing discussion, this research has its thesis anchored on the value created by the M&A’s before and during the European financial crisis. The term M&A, refers to the financial sector within the European Union, and has crucial financial mandate. Therefore, the announcement by M&A’s will be evaluated based on the deregulation and harmonization platforms. In this case, the effects of M&A’s announcements are tested and verified. Therefore, this test will act as a theoretical framework of varied effects of the financial crisis on M&A activities and value creation. The main problem statement of this essay will be based on the following question;
“Does the financial crisis influence the value created in M&A transactions in the financial sector in Europe?”
This is the central pills to this research question, and it is distinctively divided into various research questions. What are key differences in form of value creation in before and during the economic crisis that was recently adopted by through the undertaking involving M&A’s in Europe. This first question seeks to evaluate the effects in value created as a result of adopting M&A in Europe following its crisis. The difference in value creation is so strategic towards evaluating the central thesis of the essay, which is the effect of announcements to the European economic crisis. The second question is aimed at the differences in the value creation between cross-border M&A transactions and the national M&A transactions in the entire Europe. The third question examines the differences between M&A’s within and outside the European Union. These three questions are instigated with the sole mandate of establishing the effects of M&A’s transactions to the financial crisis that hit Europe. These effects are considered based on the pre and post effects that the transactions had into this crisis.
Structure and Plan of the preliminary Research Paper
Provision of a complete essay requires establishment of answers to the underlying questions. This requires adoption of various models that will be applied in answering these questions. Validation of thesis in this essay requires application of several models that justifies the answers to different questions. The first part of this essay will focus on the literature review that handle various models of research about M& A’ into the financial sectors. The first part of literature review presents the results from former academic papers, which talks about M& A’s in the financial., sector. Here, the European situation is analyzed in two perspectives including the pre and post European crisis. Various theoretical frameworks are highlighted regarding the financial crisis in Europe. In addition, this theoretical framework will help in the selection of ideal variables, which collectively supports the thesis of the essay. Therefore, the investigation of various variables provides basis for supporting factual evidence that supports the main thesis of the essay. In the next chapter, data collection and research design will be formulated in an outline format. This is then followed by descriptions empirical method used in answering research questions postulated above. Design of this study is a breakthrough towards the unfolding of the essay, which remains locked under the research study. The fourth chapter under study design involves evaluation of the results of the empirical tests already done. In the final chapter, the conclusion and recommendations are given with regard to the research questions postulated above. This short description gives an orderly pattern under which the entire research will exist. In addition, the structure of this research gives sure step towards evaluation of different aspects of study.
The literature on M&A’s is popular on the US markets, but not so on European markets. This is attributed to the current studies involving application of M&A’ s in the financial sector, which revealed that over 85% of such reviews were focusing on the US markets. Because of influent coverage of M&A’s into the European financial sector, it forms an area of great interest in exploring the financial status of the continent. One significant instance that has led to corresponding study into the European financial industry is due to the increased availability of data. This aspect makes it capable in conducting further research on the European financial industry, in line with the M&A’s financial deals (Dajcman, 2012, p.955). Some article gives specific and credible coverage resulting from practices that enhance financial viability into the European financial market. For instance, increased wealth of shareholders based on the mergers has so far been applied as gauge points into the European banking. On the other hand, the large statistical deals that existed between 1988 and 1997 exhibited that performance of bidder and the target have great statistical significance to the economy. However, there exist cross sectional variation in terms of such deals, but one thing that has stood stationary relates to the positive abnormal returns around the announcement between domestic bank to banks deals, and through other economic means such as diversification into the insurance deals. With further investigation, the results showed that M&A with security firms as well as foreign institutions did not exhibit positive abnormal turns to the economy. The significance of M&A’s financial transactions and deals has been adopted be various schools of thoughts in explaining its effects on the Europeans financial crisis that hit the economy. These scholarly points are supported by facts, and this is one scenario that this essay roots its foundation.
The second paper that shows positive results was written by Betel, Schiereck and Bahrenburg2004. In this research, an investigation of over 98 large M&A’s of the European acquiring banks ware made between years 1985 to 200. The main aim of this investigation was to establish drivers of excess returns to the shareholders of various participants including; bidders, targets and combined entities after sequent mergers. Based on this research, the findings revealed that a significant CAR of 16% was realized for the target firm with a small negative return of only -0.20%, which was considered insignificant. The findings later revealed combined abnormal returns of 1.29%, a value that hold significance at the 10% level margin. These two cases give a credible platform for conducting an investigation to the thesis of the essay. With positive net returns, the effects of M&A’s financial transactions and deals can be validly investigated and ascertained (Dajcman, 2012, p.957). This is one functional pillar of conducting research into the financial crisis of European based on its financial announcements. The effects of these announcements re equally captured within the limits of effects on returns stated above.
Despite the positive outcomes realized above; some research papers maintains negative position regarding the M&A’s transactions and deals on the European economic crisis. Morck, Schleifer and Vishny find negative returns with regards to the M&A’s financial transactions into the European economy. According to these scholars, loss of value is considered a good investment; while the negative bidder returns are a result of stock financing that culminates to a release of information on the acquiring firms. The prospects of acquiring firms are evaluated in the context of value and its targets. For instance, a hypothesis is postulated in relation to the reasons why acquiring firms undertake M&A’s and lose value. This reason is justified on the grounds that acquiring firms tend to overpay for their respective financial targets. The set of papers that show negative results concerning M&A’s deals give contrary statement to the main topic of discussion, and this is another means that the essay will validate the assertion under hypothesis under review.
The third category of research highlights mixed results with regards to the investigation of M& A deals with CAR around crucial announcements dates. This paper is postulated by J. Campa and I. Hernando, 2003, and considers the performance of European Union financial industry between the years 1998-2002. According to their findings, merger announcements generated positive excess returns to shareholders of various target companies, and this occurred around the dates of announcements. In addition, the investigations revealed that the returns for the shareholders of the acquiring firms did not appreciate much since it exhibited a practical zero percent around the announcement dates (Neck, Blueschke, & Weyerstrass, 2013, p.372). This revelation comes one year after the returns were essentially zero for both the target and the acquirer. Additional postulates into this third class of illustration shows that bank mergers, which have the capability of enhancing value upon announcements, are distinguishable from those that have not generated any value. Scholarly reviews affirm abnormal returns around the date of announcements of merging banking firms based on the activity and geographic similarity or dissimilarity. In this regard, the empirical results shows that banking mergers in which the banks have similar activity and geography enhance stockholder value by 3.0%, while the other type of merger has absolutely no value creation. The third aspect of this study is presented by Beitel and Schiereck, and finds similar results to the previous studies. In their outcome, they find that most M&A studies focuses on the US markets when considering bidder returns, and the lose value. On the other hand, they find positive returns on the CAR’s of the targets and combined entities.
The literature review gives predictable outcome of the study, and this forms the point where the research will be oriented. Based on the three aspects of research, results indicate that M&A transactions of European acquiring banks can be considered average, as well as successful. These two researchers conduct a test whether M&A’s might add more or less value than the complete sample. In this context, they present a predictable outcome and conclude that geographic diversification contributes towards the destruction of value for bidders, which seems to have no positive impact (Neck, Blueschke, & Weyerstrass, 2013, p.374). This outcome may be attributed to certain factors that potentially bar the firms from achieving their fullest operational scope. These factors are summarized as; a smaller synergy potential and fewer redundancies of difficulties merging the different cultures. At another level involving targets, positive abnormal returns were established.
From the literature review, alongside scholarly discussion, it is evident that no clear-cut conclusion can be drawn, and this calls on for further research. The effects of M&A deals happening in the European financial industry is an interesting topic of study, and requires exclusive evaluation. This forms the basis of enhancing discussion, and making further illustrations into the main thesis of the essay. Subsequent discussions will either enhance or discredit the three postulates inscribed in the literature review, and with the view of answering research questions and validation of the thesis.
Dajcman, S 2012, ‘Time-varying long-range dependence in stock market returns and financial market disruptions – a case of eight European countries’, Applied Economics Letters, 19, 10, pp. 953-957, Business Source Complete, EBSCOhost, viewed 10 March 2014.
Fahlenbrach, R, Prilmeier, R, & Stulz, R 2012, ‘This Time Is the Same: Using Bank Performance in 1998 to Explain Bank Performance during the Recent Financial Crisis’, Journal Of Finance, 67, 6, pp. 2139-2185, Business Source Complete, EBSCOhost, viewed 10 March 2014.
Neck, R, Blueschke, D, & Weyerstrass, K 2013, ‘Trade-Off of Fiscal Austerity in the European Debt Crisis in Slovenia’, International Advances In Economic Research, 19, 4, pp. 367-380, Business Source Complete, EBSCOhost, viewed 10 March 2014.
Vallascas, F, & Keasey, K 2013, ‘The Volatility of European Banking Systems: A Two-Decade Study’, Journal Of Financial Services Research, 43, 1, pp. 37-68, Business Source Complete, EBSCOhost, viewed 10 March 2014.