Mergers Produce Paradoxes, Not Easy Answers

Posted: Thursday, March 29, 2001

Some paradoxes often associated with banking mergers:

SELLERS DO WELL, BUYERS DON'T:

When news of a merger reaches the market, the stock of the acquiring bank drops in 60 percent of cases. Stocks of banks being bought, however, go up an average of 10 percent after the announcement. What's happening? CEOs are paying too much and overestimating how much new profits they can wring from old firms, says Michael Bradley, a finance and corporate law professor at Duke University. ''Egos get in the way,'' he says. ''They either think they're better managers than the ones they're replacing or they're finding hidden value or they're more entrepreneurial.'' Only when managers outperform expectations does the stock price recover in the long term.

CEOS DO WELL, SHAREHOLDERS DON'T:

''The interests of management and shareholders often diverge in a merger,'' says Jim Schmidt, lead manager of the John Hancock Regional Bank Fund. Executives are paid based on the size of their company -- a powerful incentive to grow quickly. Even when their stock price drops, CEOs gain more from higher salaries and bonuses after mergers, according to a new study by two finance professors, Richard Bliss of Babson College and Richard Rosen of Indiana University. ''The one party that benefits from every merger is the CEO of the acquiring bank,'' Rosen says.

BIG BANKS ARE MORE EFFICIENT, YET CHARGE HIGHER FEES:

If bigger banks are more efficient, their customers aren't seeing the savings. Large banks charge much more for services than smaller banks, according to the Federal Deposit Insurance Corp. Banks say they're offering better service -- branches in many states, more ATMs, Internet banking. Critics say that large banks, which dominate certain markets, charge more because they can.

CONSOLIDATION MEANS FEWER BANKS, BUT MORE BRANCHES:

Two decades of consolidation have nearly halved the number of America's commercial banks, from about 14,500 in 1983 to about 8,000 at the end of last year. The number of branches, however, has risen steadily from 55,000 to 73,000 as banks follow their customers to the places they shop.

End Adv for Release Sunday, April 1



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