Mergers and acquisitions in the Greek banking sector
P rocedia Economics and Finance 14 ( 2014 ) 13 – 22
Available online at https://www.wendangku.net/doc/c014409243.html,
2212-5671 ? 2014 Published by Elsevier B.V . This is an open access article under the CC BY-NC-ND license (https://www.wendangku.net/doc/c014409243.html,/licenses/by-nc-nd/3.0/).
Selection and/or peer-review under responsibility of the Organizing Committee of ICOAE 2014doi: 10.1016/S2212-5671(14)00680-7
ScienceDirect
International Conference on Applied Economics (ICOAE) 2014
Mergers and acquisitions in the Greek banking sector: An event
study of a proposal
Antoniadis I.a , Alexandridis A.a , Sariannidis N.b *
a
Department of Business Administration (Kozani), Koila Kozanis 50100, Greece.
b
Department of Accounting and Finance, Koila Kozanis 50100, Greece.
Abstract
Mergers and Acquisitions have been an important strategy for the Greek banking sector. During the last period of time the importance of M&A in the Greek banking sector have been reinvigorated as a result of a without precedent financial and economic crisis the Greek economy and banking sector faces, and the ongoing pressure both by Greek authorities and foreign institutions (IMF), for bigger and more efficient banks. In this paper the effect of the announcement of an M&A proposal that took place in the summer of 2010, on the share prices of three major Greek banks listed in the Athens Stock Exchange Market, is assessed. The bidder was a private bank (Piraeus Bank), while the targets banks were two state owned banks (Hellenic Postbank and Agricultural Bank of Greece). The event study methodology is used to evaluate the effect the proposal had on the stock returns of the banks involved. Our results are analysed and discussed considering the financial and corporate governance characteristics, of the involved banks and the Greek banking sector.
? 2014 The Authors. Published by Elsevier B.V. Selection and/or peer-review under responsibility of the Organising Committee of ICOAE 2014.
Keywords : Mergers and Acquisitions; Event Study; Banking Sector; Greece.
1. Introduction
Mergers and Acquisitions had been an important and critical strategy for firms to achieve growth and efficiency, by creating synergies, reducing costs, acquiring assets and expanding to new markets. (Martynova and Rennenborg 2006, Altunbas and Ibà?ez 2004). Overall mergers and acquisitions lead to increased profitability (Gugler et al 2003) for both manufacturing and service sectors.
* Corresponding author. Tel.: +30 24610 68221. E-mail address: iantoniadis@teiwm.gr .
? 2014 Published by Elsevier B.V . This is an open access article under the CC BY-NC-ND license (https://www.wendangku.net/doc/c014409243.html,/licenses/by-nc-nd/3.0/).Selection and/or peer-review under responsibility of the Organizing Committee of ICOAE 2014
14I. Antoniadis et al. / P rocedia Economics and Finance 14 ( 2014 )13 – 22 Greek banking sector held no exception. M&A activity in Greece was strong during the second half of the 1990’s (Athanasoglou et al. 2005) concerning domestic banks and deals, while in the first half of the 2000’s, deals focused on target banks that were mainly foreign banks especially in the area of South-Eastern Europe. This strategy has proven to be successful for banks that adopted it as they performed better in terms of efficiency compared to thei r competitors that that didn’t proceeded to mergers and acquisitions (Mylonidis et al. 2005).
In this paper the effect of the announcement of a recent M&A proposal on the share prices of three major Greek banks is assessed in the summer of 2010. The bidder was a private bank (Piraeus Bank), while the targets banks are two state owned banks (Hellenic Postbank and Agricultural Bank of Greece). The announcement has taken the market by surprise and provoked strong reactions and discussions concerning the upheavals that its potential success would bring in the Greek banking sector. Using event study methodology and calculating abnormal returns of the three banks for the period 17/6/2010 –12/8/2010 we examine the effect this announcement had on their share prices.
Our findings are in line with the findings of the relevant literature for the two of the three banks (Piraeus Bank, and Hellenic Postbank), but completely different for the third (Agricultural Bank of Greece). A more thorough explanation can be given by examining the characteristics of the three banks providing support for the efficient market hypothesis.
The rest of the paper is structured as follows. In the following section the characteristics of the three involved banks are described. The third section offers a brief review of literature concerning relevant empirical work on mergers and acquisitions in the Greek banking sector and the European financial sector. Event study methodology is analyzed in section 4, while empirical results are discussed in section 5. Finally section 6 concludes the paper.
2.The proposal
During the last period of time discussions concerning M&A in the Greek banking sector have been reinvigorated as a result of a without precedent financial and economic crisis the Greek economy and banking sector faces. Greek banks found themselves operating in a suffocative macroeconomic environment with limited liquidity, restriction of credit expansion, unstable financial markets, and increasing disbelief both from customers, the government and foreign creditors, leading to an increase in non productive loans (NPLs), and a sharp decrease in profits and income (Bank of Greece 2011). The joint intervention from the European Union, the European Central Bank and International Monetary Fund, providing funds to the Greek Economy, in return for a hard austerity program, has made things worse leading the economy to an unprecedented recession, and Greek banks to finding ways to overcome the situation. A proposed solution was mergers between banks, thus creating more efficient organizations with less operating costs and high levels of liquidity.
Table 1 : Ownership structure of the banks in the M&A proposal
Agricultural Bank of Greece Hellenic Postbank Piraeus Bank
Greek State 77.312% Greek State 34.430%
No block holders
> 5.000 % Hellenic Post 9.904%
EFG Eurobank Ergasias 6.075%
National Bank of Greece 6.070%
Source: Athens Stock Exchange (www.ase.gr)
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I. Antoniadis et al. / P rocedia Economics and Finance 14 ( 2014 )13 – 22
The three banks account for the Piraeus Bank has a long history of M&A proposals and deals both in Greece and the region of South East Europe, that were used to aggressively expand bank’s operations locally and abroad. In Table 1 the ownership structure of the 3 banks is shown. Piraeus Bank has no shareholder holding more than the 5% of the shares. On the other hand Hellenic Postbank (TT) and ATEbank (ATE) are two banks controlled by the state that have transformed into commercial banks very recently. We should also note that 2 main competitors of Piraeus Bank, EFG Eurobank Ergasias and the National Bank of Greece hold 6.075% and 6.070% of TT shares respectively.
In Table 2 the main financial results of the three banks examined are demonstrated. ATE has the biggest branches network (483), while Piraeus bank has more loans than the other two banks, but TT has the best Tier
I index compared not only to the other two banks but also in the Greek Banking sector.
Table 2: Financial Results of the three banks (in millions €)
2007 2008 2009 2010
Panel A: Agricultural Bank of Greece
Total Assets 23,399.2 27,661.3 31,988.9 31,986.8
Total Equity 1,449.0 888.8 1,303.4 1,057.7
Capital adequacy 8.5 % 8.4 % 9.6 % 8.6 %
Tier I - 6.7 % 9.1 % 7.9 %
Loans 17,771.9 21,660.8 23,298.2 22,091.8
Deposits 20,713.6 20,990.3 22,682.8 20,633.2
Provisions 922.1 705.9 1,131.8 1,131.8
Net Interest Income 614.9 625.4 729.5 386.0
Staff Expenses 339.1 346.9 393.3 187.8
Operating Profits 268.4 13.8 -406.7 -120.5
Employees 6,368 6,395 6,500 6,147
Branches 470 478 482 483
Panel B: Hellenic Postbank
Total Assets 13,182.4 14,904.5 17,960.0 18,177,5
Total Equity 747,1 532.9 1,224.2 871.4
Capital adequacy 9.9 % 8.6 % 17.1 % 15.4 %
Tier I 12.1 % 8.6 % 17.1 % 15.4 %
Loans 6,110.3 7,162.0 8,034.8 8,063.8
Deposits 11,155.6 11,231.0 12,657.7 12,707.0
Provisions 86.8 122.0 146.7 161.0
Net Interest Income 294.3 321.7 259.6 308.6
Staff Expenses 100.7 101.5 119.9 50.2
Operating Profits 50.2 2.6 40.7 -32.8
Employees 1.312 1,685 2,419 2,398
Branches 140 144 146 146
Panel C: Piraeus Bank
Total Assets 42,343.3 50,212.9 48,922.0 51,046.4
Total Equity 2,944.2 2,623.8 3,238.1 2,969.9
Capital adequacy 12.3 % 9.9 % 9.8 % 9.3 %
16I. Antoniadis et al. / P rocedia Economics and Finance 14 ( 2014 )13 – 22
Tier I 9.8 % 8.0 % 9.1 % 8.4 %
Loans 27,080.1 33,964.5 31,856.6 32,726.2
Deposits 19,030.0 24,109.5 25,729.6 24,254.2
Provisions 317.1 481.9 611.1 729.7
Net Interest Income 705.3 849.6 783.7 409.6
Staff Expenses 254.1 266.4 256.9 117.4
Operating Profits 498.1 137.0 200.7 50.1
Employees 6.600 6.889 6.660 6.370
Branches 320 358 359 360 Source: Financial statements – Annual Reports.
The Chairman of Piraeus Bank made the proposal on the 15th of July 2010, concerning the 77.31% of the Agricultural Bank of Greece and the 33.04% of the Hellenic Postbank, that is the participation percentage of the Public sector to the two banks. The amount of money, offered in cash, to be paid for the two state banks was 372 million € for Agricultural Bank of Greece and 329 million € for Hellenic Postbank, and the method of payment would be cash. Taking under consideration the previous day share closing prices the bid offered a discount of 50.3 % for the Agricultural Bank of Greece and a premium of 29.6% for the Hellenic Post bank.
According to Financial Analysts the new bank would have become the second largest bank in Greece, with about 1000 branches and more than 25.000 employees, while its assets would exceed 105 billion €, with 64,000 million deposits and about 69,000 million € in loans. As a result of the merger and the economies of scale and the synergies that would be created, 300 million euros would be saved within a period of three years, as a result of expenses cuts, synergies and operational complementarities, while at the same time there would be no need for layoffs.
Notwithstanding the fact that the bid would had upon its completion a number of advantages and benefits for the three banks, the Greek Banking sector, and the Greek economy, the market addressed this proposal with disbelief and scepticism. The CEO of Agricultural Bank of Greece (former Vice Chairman and Deputy CEO of Piraeus Bank) expressed his objections to the proposal, rejecting it, while employees in Hellenic Postbank clearly declared their opposition to the proposed scheme, calling a strike the same day the announcement was made. Finally the proposal was withdrawn in 30/09/2011.
3.Literature Review
According to literature M&A create synergies, generates and exploits economies of scale and scope, expands operations in new markets, products and services (economic and geographic expansion), expansion of client list, diversification of activities, and finally cost and risk reduction, therefore leading to enhanced financial and operational performance. Deals between larger banks however are also motivated from the need of strategic reposition and conglomeration (Asimakopoulos and Athanasoglou 2009) especially in an unstable and risky macroeconomic environment. Incentives however concerning the bidders decisions may not always root from efficient organizational or financial rationale, but form deriving personal benefits for the management of the acquiring bank (Palmucci and Caruso 2008)
Bruner (2002) identifies event study methodology as the main approach used by researchers to examine the relationship between M&A profitability for the shareholders, measured by stock returns, as it literally dominates the relevant literature. A review of the literature for M&A in the European banking sector exhibit that there are positive abnormal returns for target banks (Spyrou and Siougle 2010), as the result of investors’ expectations for better utilization of their assets. Shareholders of acquiring banks on the other hand suffer minor losses of value, in most studies, due to negative abnormal returns rising from investors’ disbelief concerning the motives of the proposal, and issues related to the success of the proposed scheme.
17
I . Antoniadis et al. / P rocedia Economics and Finance 14 ( 2014 ) 13 – 22 Despite the fact that the majority of studies find that there is a positive relationship between M&A and
shareholder wealth creation on the whole, literature on the subjects seems to be inconclusive (Ismail et al. 2011). Athanasoglou et al (2004) examined the effect that M&A anouncements had in the Greek banking sector during the period 1997-2002. Their findings demonstrated high abnormal returns for both acquiring and target banks after the announcement date. Goergen and Renneboog (2004) in their study of takeover bids for 18 European countries, also reported significant positive cumulative abnormal returns for all periods of time prior and after the announcement for targets banks but only trivia returns for bidding banks.
Mylonidis et al (2005) examining five M&A deals in the Greek banking sector also found that both target and acquirers banks demonstrate positive stock returns but significantly smaller for the latter. Campa and Hernando (2006) reported positive abnormal returns in the days before the announcement, explained by the expectations the market builds concerning the coming announcement and the information disclosed afterwards. However for the period after the announcement target banks displayed positive returns. Alexakis et al (2008) studied the effect of privatizations on stock prices of 18 State owned companies in the Athens Stock Exchange market, finding minor differences from the expected prices, providing evidence that the market behaves according to the assumptions of Efficient Market Hypothesis.
The characteristics of the proposal concerning the means of payment influence significantly the share price reaction of both targets and acquirers firms (Martynova 2006). Travlos (1987), as well as Faccio and Masulis (2005), make a distinction between cash and stock offers made by acquirers, finding that cash offers provide positive returns for shareholders in contrast to stock offer proposals. Moreover issuing stock as a way of carrying out an acquisition may weaken the dominant shareholders’ position in the new scheme, whi ch can also be interpreted as a negative sign by shareholders leading to negative returns.
Finally financial characteristics and strategic orientation play a substantial role on the expected abnormal returns the stock prices may demonstrate. Incompatible organizations in terms of organizational behavior, management, customer base, size, loans and deposits strategies and capital structure face serious integration problems, leading to increased cost of the whole procedure (Bruner : 2002, Altunbas and Ibà?ez 2004), that would also affect their stock returns. Asimakopoulos and Athansoglou (2009) find that shareholders of acquiring banks are better off in the cases where targets banks involved in the M&A are smaller in size and less profitable, as expectations for better and more efficient reorganization of the target banks are bigger. Interestingly neither liquidity (loans to deposits ratio) nor efficiency is found to be statistically significant for the value created by a M&A deal. 4. Data and methodology
In this paper In order to examine the effect of the announcement of the proposed acquisition to the stock prices and the returns of the stocks of the banks involved the event study methodology is used (Brown and Warner 1985, Campbell 1997:pp.149, Binder 1989). The event day is identified on the 15th of July 2010, the day that the Chairman and CEO of Piraeus Bank announced the proposal on the media (www.naftemporiki.gr,www.capital.gr).
The calculation of abnormal returns is central to this methodology. Abnormal returns are calculated, as the difference of the actual minus the expected returns, should the event didn’t happen. The actual return of stock i, and return of market is calculated using the following relationship
,
where P t is the closing price of the stock price, the closing price of the market index. The stock prices that were used are daily close prices of the three banks involved in the proposal, and the general index of the market is used to estimate the market return
R t ln(
P t
P t 1)
18 I . Antoniadis et al. / P rocedia Economics and Finance 14 ( 2014 ) 13 – 22
After calculating the actual returns of firms’ stocks, and the return of the market the estimation of expected
returns takes place. Expected returns are estimated with the use of a market model through an OLS regression for the estimation window [T, -t ew ). The estimation window used to calculate the expected returns for each bank, is 300 trading days before the 17/6/2010, namely the period between 1/4/2009 and 16/6/2010. Expected returns are then calculated by estimating equation (1), using the OLS method:
, (1)
where at time t : R it is the actual return of the stock i, R mt is the return of the market, αi, b i are the coefficients of the OLS model and εit is the zero disturbance term with E(εit )=0 and Var(εit )=σεit 2. The following step is to calculate Abnormal Returns (AR it ) that are estimated as the difference of expected return for time t , and actual returns of the stock i for time t as follows in equation (2):
(2)
where , ??? ?
?, are the estimates for the coefficients αi b i , Cumulative abnormal returns (CAR ) are then calculated as the sum of all abnormal returns for the bank i (AR it ) during the event window where t [-t ew ,+t ew ].
where -t ew is the number of trading days before the event (t 0) and +t ew is the number of trading days after the event (t 0). The event window used in this study to calculate both abnormal returns (AR ) and Cumulative Abnormal Returns (CAR ) is 20 trading days before and trading 20 days after the announcement [-20,+20] namely the period between 17/6/2010 and 12/8/2010. Athanasoglou et al. (2005) as well as Spyrou and Siougle (2010), report an extensive number of studies concerning event studies on M&A announcements where the event window range from 3 days to 3 years, but periods o f ±10d, ±20d seems to be the more frequently event window periods used. The larger the event window the greater is the increase in the amount and significance of abnormal returns (Soongswang 2010). In addition different intervals within the event window were also used to thoroughly investigate any reactions to stock returns.
To test the significance of the announcement on the stock price a statistic s of the abnormal return and average abnormal return respectively:
In a similar fashion the relevant significance test for cumulative abnormal returns and cumulative average abnormal returns are the following.
The statistics also follow normal distribution N(0,1) and under the null hypothesis cumulative abnormal returns equals to zero. Rejection of the null hypothesis demonstrates that the effect of the announcement of the proposal was statistically significant, and that it had a significant effect on the stock price of the banks.
R i t a i b i R m t H i
CAR i
AR
i t
t t e w
t e w
|s A R i t AR i t
Va r (AR i t
) , s R i t
AR i t Va r (AR i t ) T C
A R i ( t e
w ,t e w
) C A R i ( t e
w ,t e w
)V a r (C A R i ( t e w ,t e
w
)) , T C A R i ( t
e w ,t e w
)
C A R i ( t e
w ,t e w
)V a r (C A R i ( t e
w ,t e
w
))
19
I. Antoniadis et al. / P rocedia Economics and Finance 14 ( 2014 )13 – 22
5.Empirical Results
In Table 3 the estimates of the asset-pricing model (1)are shown for the three examined banks. Beta coefficients are found statistically significant in all cases, and both R2, and Adjusted R2 are relatively high ranging from 0.60 to 0.78.
Table 3 : Regressions estimates of the 3 banks
ATE TT PEIR
alpha 6.75 e-5 -2.74 e-4 -6.59 e-4
( 0.04 ) ( -0.21) ( -0.62)
beta 1.4429 1.2612 1.4891
( 21.33 )*** ( 21.86)*** (32.42)***
n. obs 300 300 300
R2 0.6043 0.6159 0.7792
Adjusted R20.6030 0.6146 0.7784
Numbers in brackets are the t-statistics values. ,* indicates 10% significance level, ** 5% significance level, *** 1% significance level Using the estimates derived for the expected returns abnormal returns for the examined period are calculated, and are displayed in Figure 1 for the three banks. The proposal took place in 15/7/2010, where the three banks stopped trading. A systematic pattern for the occurrence of abnormal returns cannot be observed,
as abrupt variations occurs. Abnormal returns are high for TT only after the day of proposal and are significantly higher compared to the other two banks.
Fig. 1: Abnormal Returns during the period t=±20 days of the proposal.
The abnormal returns of each bank involved in the proposal were calculated for every day during the period 17/6/2010 and 12/8/2010. For the 20 days period before the proposal, abnormal returns for each bank
20I. Antoniadis et al. / P rocedia Economics and Finance 14 ( 2014 )13 – 22 are not statistically significant. The only case where the abnormal return is statistically significant for ATEbank and Piraeus Bank is 10 days before the proposal, but this cannot be linked directly to the event under consideration. Average abnormal Returns for the three cases demonstrate varying fluctuation and are not statistically significant.
On the day of the proposal however, the stock price of all three banks displayed an abrupt increase in their prices (as shown in Figure 1), and the same happens to their abnormal returns as it is displayed both in Figure
2. For this day abnormal returns are statistically significant at 1% level of significance, for the Hellenic
Postbank (16.691%) and Piraeus Bank (8.647%), indicating the importance the investors attributed to the acquisition of Hellenic Postbank for Piraeus Bank due to the high level of deposits it has, and its high capital adequacy as it is shown in Table 2. This finding however is limited only for the day of the announcement and for two more dates for the targets banks (t =+8 and t= +19 for ATE, t = +7 and t = +19 for TT) and only for one date (t = +8) for the acquiring bank, during the 20 days after event period.
Table 4 and Figure 2 reports the Cumulative Abnormal Returns for different time periods before and after the proposal. TT outperforms both the acquirer bank and the other target bank, despite the fact that is a smaller bank with less credit and stock market history. For the examined time period TT achieves a cumulative abnormal return of approximately 40.76%, while Piraeus Bank reaches 9.71% whereas ATE falls to -5.67%. The stock returns of the period examined for the target bank (TT) was almost four times of the bank proposing the acquisition contrary to the expected results (Athanasoglou et al., 2004) The bank that made the proposal exhibits positive cumulative abnormal returns for almost every day interval examined, except the ones referring to [-20,-15], [10,15] and [15,20]. Despite the rather positive returns for Piraeus Bank, none of them are statistically significant.
Table 4: Cumulative Abnormal Returns for different day intervals.
Day intervals
CAR
ACAR ATE TT PEIR
[-20,-15] -1.674% -1.970% -5.202% -2.949%
[-15,-10] 2.162% -3.892% 4.498% 0.922%
[-10,-5] -7.127% * -2.456% 1.363% -2.740%
[-5,0) 0.067% 19.712% 8.177% 9.318%
(0,5] -4.623% 20.911% 8.101% 8.130%
[5,10] 4.376% 19.257% 5.942% 9.859%
[10,15] -4.198% -3.497% -0.743% -2.813%
[15,20] 6.648% 11.584% -1.261% 5.657%
[-20,0) -5.000% 11.929% 7.893% 4.941%
[-10,0) -6.728% 16.438% 9.831% 6.514%
[0,10] 1.694% 39.632% ** 13.248% 18.192%
[0,20] 2.452% 45.525% * 10.472% 19.483%
[-1,1] 2.104% 18.239% 8.260% 9.534%
[-5,5] -7.688% 23.932% 7.6312% 7.958%
[-10,10] -8.165% 39.380% * 14.432% 15.216%
[-20,20] -5.678% 40.764% 9.718% 14.934% * indicates 10% significance level, ** 5% significance level, *** 1% significance level
As for the target banks, their shares both show negative cumulative abnormal returns for time periods before the event, but none of them are statistically significant. Stock returns for ATE show higher fluctuation compared to TT. For the period of the event window after the proposal the situation changes dramatically for
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I. Antoniadis et al. / P rocedia Economics and Finance 14 ( 2014 )13 – 22
the stock returns of TT. Cumulative abnormal returns for TT are positive and statistically significant for 10 and 20 days periods after the proposal day, reaching an impressive 39.63% and 45.52% respectively. The same results appear for the periods [-5,5], [-10,10] and [-20,20] where cumulative abnormal returns are very high and statistical significant. It should also be noted that for the periods [-1,1] and [-20,20] the null hypothesis H0: CAR i,[t1,t2]=0 , is marginally accepted for a 10% level of significance.
Figure 2: Cumulative Abnormal Returns of the three banks
Despite the fact that stock returns, for the other target bank (ATE), are positive for the time periods after the proposal, overall the potential returns for investors 10 and 20 days before and after the proposal are negative (-8.16% and 5.67% respectively), achieving the worst performance between the three banks. These results however are not statistically significant. Finally average cumulative abnormal returns (ACAR) are not statistically significant for any of the time periods examined.
The above results support the efficient market hypothesis. TT is a small bank with little organizational problems as it became a bank only recently, and has a very good ratio of deposits to loans that attracts bidders especially in times where banks struggle for liquidity. On the other hand ATEbank is a big bank in terms of assets but suffers from significant organizational problems and bad loans. The market taking under consideration the above has evaluated positively the proposal for TT, but not for ATEbank taking under consideration both the financial and organizational characteristics of the two banks (Bruner 2002, Pettway and Thrifts 1984). It is also interesting to note that there are no significant positive ARs prior to the announcement
of the proposal that would suggest a possible information leakage (Campa and Hernando, 2006).
Another issue that should be considered is the investors’behavior (Barberis et al 1998). Alexakis et al (2008) attribute to possible over pessimism or optimism of investors changes in stock prices that cannot be logically explained in non-mature stock markets as the Greek one. That could be the issue as the Greek stock market suffered severely form the economic crisis the last 3 years.
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6.Conclusions
In this paper the effect of an acquisition proposal on two Greek State banks on July 2010 has been examined. The event study methodology was used for the 3 banks involved in the proposal, evaluating the effect that it had on their stock returns. Statistical tests were applied on both abnormal returns and cumulative abnormal returns for different day intervals.
Our results are in line with the efficient market hypothesis. The share prices of Hellenic Postbank, and Piraeus bank has risen for the period of time after the day the proposal took place. ATEbank however displayed negative returns and was not influenced by the proposal. These findings can be explained by the financial and organizational characteristics of each bank that were taken into account by investors.
Our findings however should be considered under the extremely difficult situation faced by banks not only in Greece but in Europe as well. The formation of larger banks through M&As will not be enough by its own without taking under consideration aspects concerning liquidity, and organisational issues.
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