The value added by private equity in mergers and acquisitions by financial institutions

ABSTRACT

We compare and contrast (i) mergers and acquisitions (M&As) by financial institutions (FIs) that had the involvement of one or more private equity firms (PE) with (ii) acquisitions with no private equity involvement. We find that the M&A announcement abnormal stock returns are higher for acquisitions with- than without private equity involvement. Likewise, the post-announcement long-term annual stock returns are higher for deals with PE involvement. These deals also produce higher operating performance, and their stocks exhibit less volatility in the months following the announcement after controlling for a host of confounding variables. Our results are robust to year fixed effects, industry (i.e. business line) effects, and self-selection bias.

KEYWORDS:

• Financial institutions
• banks
• mergers and acquisitions in the financial industry
• private equity

JEL CLASSIFICATION:

• G20
• G21
• G34

Disclosure of potential conflicts of interest

No potential conflict of interest was reported by the author(s).

Notes

¹ https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/private-equity-investments. The European and Private Equity Venture Capital Association (EVCA) provides a classification of private equity in terms of stage and type of financing they provide to target companies.

² White & Case LLP. (2017). How private equity is powering financial services M&A.

³ KPMG International (2016). Banking and private capital: friend or foe?, April. Accessed at: https://assets.kpmg/content/dam/kpmg/pdf/2016/05/ie-private-capital-friend-or-foe.pdf.

⁴ A Bloomberg Law Report covers these tensions in detail. See Private Equity Investments in Financial Services Firms: Threading the Regulatory Needle, Bloomberg Law. Reports, 2011.

⁵ Financial Times (2007). Private equity buying banks is not a good mix, September 17. Accessed at: https://www.ft.com/content/3afc2dba-b848-11e8-b3ef-799c8613f4a1. Note that more leverage cannot be used in US banks’ acquisitions as the regulators will not approve such deals. EBITDA stands for earnings before interest, taxes, depreciation and amortization.

⁶ See Financial Times (2018). How the biggest private equity firms became the new banks, 20 September. Accessed at: https://www.ft.com/content/ec43db70-ba8e-11e8-94b2-17176fbf93f5.

⁷ As discussed earlier, PE firms are unlikely to take a significant stake in FIs due to regulations. As such, we do not provide a review of the literature on private equity in non-FIs, where they are the controlling shareholders. Nonetheless, we list several studies that review the vital role played by PE as well as the value their involvement generates: Thompson and Wright (1995); Wright and Robbie (1999); Desbrièresand Schatt, (2002); Wright et al. (2006); Leslie and Oyer (2008); Axelson, Strömberg, and Weisbach (2009); Kaplan and Stromberg (2009); Wood and Wright (2009); Metrick and Yasuda (2010); Guo, Hotchkiss, and Song (2011); Ivashina and Kovner (2011); Lerner, Sorensen, and Strömberg (2011); Müller (2011); Tykvová and Borell (2012); Acharya et al. (2013); Axelson, Strömberg, and Weisbach (2009); Harris, Jenkinson, and Kaplan (2014); Gompers, Kaplan, and Mukharlyamov (2016); Holloway, Lee, and Shen (2016); Sun and Uchida (2016). Related studies documenting PE’s involvement in M&As include Gaughan (2007); Bargeron et al. (2008); Kim and Palia (2014); Humphery‐Jenner, Sautner, and Suchard (2017); Balasubramaniam, Gomes, and Lee (2018).

⁸ Hunton & Williams LLP. (2009). Private Equity Investments in Financial Institutions, January.

⁹ We control for year fixed effects and the acquirer’s business fixed effects. We calculate the t-statistics based upon robust standard errors. All the financial variables are measured at end of fiscal year prior to the announcement. They apply to all the regressions included in the paper.

¹⁰ Source: American Banker (2020). 6 takeaways from bank M&A in 2019, 05 January. Accessed at: https://www.americanbanker.com/list/6-takeaways-from-bank-m-a-in-2019.