Mergers & acquisitions in the Lebanese banking Industry. (c2002)

Abstract

The banking industry worldwide has been recently faced by fundamental economic and global forces of radical change mainly driven by the evolving technological breakthroughs and the opening up of intense international competition. The playing stadium is now the world financial market rather than the narrowly defined and protected national markets. Banks in specific have to achieve a critical size to effectively compete with foreign and international players whose penetration into domestic markets is facilitated by new technology and relaxed regulations. So mergers and acquisitions (M&As) were primarily sought as a quick vehicle for growth. Based on the comprehensive body of research on the M&As in the US banking industry, this research is aimed at extending the literature on the efficiency effects of bank mergers to the Lebanese banking industry that has been exhibiting a mild consolidation wave sin.ce 1994. Consolidation has been sparked by the 1989- 1991 crisis of problem banks. The severe social costs from those failures and the fear of potential failure the industry can no longer endure, prompted regulatory authorities to initiate a consolidation wave by encouraging larger banks to acquire smaller and/or weak banks in an over-saturated banking system. Using data on nine mergers between 1997 and 1999, this study examines the changes in performance of acquiring banks. Following the operating performance approach, the study analyzes the changes in a set of financial ratios, from the year preceding the merger to the two years after the merger. The empirical evidence is mixed with no clear improvement in overall operating performance at least in the short term, but with improvements in some cost components mainly staff costs. Results on profitability are more promising with the sample being on average better-off limiting the declines in earnings the industry has been witnessing due to economic pressures. The analysis tries to look at other variables, away form the merger or associated with it that could have increased costs, unrelated to efficiency. Cost benefits, if any, seem to be offset by other expenditures owing to the heavy investment in information technology and mergerrelated costs like costs of integrating management systems and indemnity payments for released staff. Also evident is the increase in the level of doubtful loans, accompanied by heavy provisioning efforts, mainly attributed to the merger; thus adding to the acquirers' cost bases. The study presents some implications for further research and addresses policy implications. The message is optimistic but the industry and regulatory authorities should be prepared for an extensive consolidation wave; but if not put within an adequate framework, it will lead to deteriorations affecting the industry's prudent banks.