The choice of IPO versus M&A: evidence from banking industry

Abstract

This study investigates factors influencing private banks’ exit strategy between going public (Initial Public Offering (IPO)) and being a target in Merger and Acquisitions (M&A). Evidence indicates that a bank with high liquidity, operating in a geographical deregulatory environment is more likely to go for the M&A option. Larger and older institutions, improved economic environment, increased recent trend of choosing IPOs and smaller difference in premiums paid between the alternative choices are likely to encourage banks to opt for IPO as an exit strategy. We observe the existence of self-selection in making the exit choice and find that the average transaction value of bank IPOs (M&As) would have been higher (lower) had the banks chosen to engage in M&A (IPOs).

Notes

¹ See, for example, Hunter and Wall (1989), Hawawini and Swary (1990), O’Keefe (1996), Berger et al. (1999) and Wheelock and Wilson (2004).

² For example, Florida and New Hampshire still strictly ban branching. Alabama restricted branches in countries with lower than a specified population level. Minnesota prohibited branching, but permitted facilities within 1000 feet of the main office. Other states used a combined measure consisting of bank size, population served and distance from main office as a branching determination (Amel, 1993).

³ Maine started allowing out-of-state BHC to buy banks residing in Maine with reciprocity laws since 1978. However, because no other states established out-of-state acquisition rules, Maine's laws remained inactive until 1980s, when New York and Massachusetts passed interstate banking laws.

⁴ The states that allowed the interstate branching by 1994 are Alaska, Massachusetts, Nevada, New York, North Carolina, Oregon, Rhode Island and Utah.

⁵ See Carrow and Heron (1998) and Johnson and Rice (2007) for further discussions on the authorities of individual states post the IBBEA Act.

⁶ For evidence on market power, see e.g. Berger and Hannan (1998).

⁷ Evidence by Hubbard and Palia (1995) shows that turnover and the sensitivity of pay to performance for senior executives increase after states allow interstate banking, indicating an increased alignment between management and shareholders.

⁸ Hadlock et al. (1999) show that bank managers with a large ownership stake might push for being acquired in the hope of receiving an attractive takeover premium.

⁹ For further explanation and examples on interstate banking prior to the IBBEA, see Savage (1993).

¹⁰ For further explanation and examples on interstate branching pre- and post-IBBEA, see Johnson and Rice (2007).

¹¹ In spite of this common prediction, Rosen et al. (2005) find that younger banks are more likely to go public than stay private using a size-matching sample.

¹² Many recent papers define local banking market by MSA, see Dick (2008) for a recent example.