Discussion of: M&A Operations and Performance in Banking by Beccalli and Frantz

1. Discussion of: M&A Operations and Performance in Bankingby Beccalli and Frantz Emilia Bonaccorsi di Patti Bank of Italy Structural Economic Analysis Dept. Financial Structure and Intermediaries Division

2. Summary • Estimate impact of M&As on bank performance • 714 deals of EU acquirers and worldwide targets announced between 1991-2005 • Use accounting ratios and x-efficiency measures (cost and profit) • Compare domestic and cross-border deals: • a) ex ante differences • b) ex post change in performance

3. Main Findings • In years before the deal targets have weaker performance than acquirers (consistent with many studies) • Domestic deals: cost efficiency gains (new), no improvement in ROE and profit efficiency • Cross-border: slight cost efficiency improvement, profitability deterioration (new, inconsistent with previous evidence?) • Institutional proximity variables affect change in efficiency

4. General Comments Nice dataset, ambitious goal Related literatures: • A) Bank M&As and performance • B) Cross-border activities and foreign bank entry • C) Geography and banking Paper should do more effort in justifying why things are done and comparing findings in B) and C) Putting together cross-border and domestic and using a very large number of countries might be too ambitious: selection issues, different motivations  trade-off between generality and robustness

5. General Comments Greater effort in understanding what makes a merger successful: the paper goes in this direction (institutional variables) but more on how bank-level characteristics interact with business environment (sources of cost and profitability changes) Risk is outside the picture: evidence that mergers have positive impact on profitability through diversification and through improving the loan portfolio quality (what causes deterioration in profitability?) Are results robust? Data treatment and econometric issues

6. Robustness of Results: Efficiency 1. Cost and alternative profit X-efficiency measures: Stochastic frontier model for panel data with fixed effects (Battese and Coelli,1995), Fourier-Flexible functional form: Model has a structured error term modeled as truncated normal Efficiencies are systematically time varying Key issue: are the estimated efficiencies robust to the specification? 2. Studies using cross-country data and efficiency comparisons are problematic (Berger, 2007): need to test the hypothesis. • Can we say there is one frontier for all these banks? Not sure a country dummy is enough to control for differences. • Deviations from mean efficiency levels are difficult to interpret

7. Robustness of Results: Efficiency 3. Countries are very heterogeneous and banks differ in size and product mix also because of institutional factors: regulation/macro environment changed in the last 15-20 years in many countries. What is the structure of the time varying firm specific effect? Common for all countries?  By constructions efficiency depend on country controls, how does this affect the econometric tests? 4. Other things to think about: Efficiencies have been found to be affected by scale bias: try normalization by equity (nice economic interpretation for profit efficiency). Compare results with efficiency ranks not levels Not clear how one should computing a pro forma efficiency index for two banks that operate in two different environments: what are we picking up using weighted mean of deviation from mean efficiency?

8. Robustness of Results: Data • Asymmetry in country matrix: US banks are included only as targets and nonM&A benchmark banks but they represent a very large share of the sample (try dropping) • Problems in defining the benchmark: a) different between targets and acquirers (implications?); b) maybe should use peer group (Akhavein, Berger, Humphrey, 1997) • Pooling cross-country and domestic M&As is interesting but also problematic: What type of selection mechanism could be operating? How do authors think this could influence results? Analyze groups of more homogeneous countries (helps compare results with other studies) • How do you treat acquirers that do more than one deal also in other industries? What are the boundaries of the firm? The conglomerate/banking group or the individual banks?

9. Robustness of Results: Variables • Analysis uses net income over market value of equity, operating cash flow / equity : problem: market values are affected by the merger. Are results robust to dividing by assets? • Tax differences in years after merger across countries might influence ROE • In case of a cross-border merger, which country the institutional variables refer to? More discussion on what are the expected effects (see literature on foreign bank entry) • Attrition and selection in data: Data on targets appears to be incomplete; • M&As after 2003 are dropped in ex post analysis? • Unadjusted accounting measures are not very useful.

10. Conclusion • Many papers on effects of bank M&As, we cannot draw a general conclusions probably because there is none out there: countries, period, type of deal matter  important to compare result from same data & different method • What I (we?) would like to know is: What makes a deal succeed or fail? Investigate deals that work and those that do not and compare them:  Focus on acquirers in international transactions could be a nice perspective • What is success? Success for the firm might not be the same for the policy maker: market power versus efficiency gains  use more variables in regressions (e.g. differences in banking market structures, business overlap etc.); diversification (quality of loan portfolio, capital)