Chapter 19

Acquisitions and Mergers in Financial-Services Management

Fill in the Blank Questions

1. The____________________________________________ is the law that requires each merging

bank to seek approval from its principal federal regulating agency before a merger can take place.
Answer: Bank Merger Act

2. Under the terms of Bank Merger Act, the federal regulating agencies must give top priority to
the______________________ of the proposed merger.
Answer: competitive effects

3. In the______________________ method of acquiring a bank, the bank purchases all or a portion

of another bank's assets.
Answer: purchase of assets

4. In the____________________________________________ method of acquiring a bank, the

bank assumes all of the assets and liabilities of the other bank which ceases to exist.
Answer: purchase of stock

5. If the earning per share of the merged firm has declined then the shareholders have suffered a
problem known as____________________________________________ .
Answer: dilution of earnings

6. The______________________ tells how may shares of stock the shareholders of the acquired
firm will receive from the acquiring firm.
Answer: exchange ratio

7. The____________________________________________ is the amount over the current stock

price shareholders of the acquired firm will receive from the acquiring bank in a merger.
Answer: merger premium

8. The____________________________________________ is a measure of the market

concentration of a given market area. The larger this number is the more concentrated the
market.
Answer: Herfindahl-Hirschman Index (HHI)

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 9. A large metropolitan or money center bank is often called a(n)______________________ .
Answer: wholesale bank

10. A(n)______________________ takeover is a merger which is resisted by the existing

management and stockholders.
Answer: hostile

11. If a bank can show that the merger has___________________________________________ it

may be able to overcome anticompetitive problems of the merger. This is the impact the merger
has upon the convenience and service needs of the community.
Answer: public benefits

12. To most authorities, the recent upsurge in mergers reflects the expectation of the stockholders that
the____________________________________________ will increase once the merger is
completed. This allows the merged bank to maximize future earnings.
Answer: profit potential

13. One reason banks pursue mergers is for______________________. This allows the bank to
reduce fluctuations in revenues and net income.
Answer: risk reduction

14. One reason banks pursue mergers is for______________________. This allows the bank to enter
new markets and find new sources of revenue.
Answer: market positioning benefits

15. When the existing ownership of the bank experiences a loss in their share of the company due to
an increased number of shares going to new stockholders it is known as
______________________.
Answer: dilution of ownership

16. "Intangible synergies" is a relatively new name for _____________.

Answer: goodwill

17. One of the reasons for a merger is . This where the merger is encouraged
by the FDIC as a way to conserve scarce federal deposit insurance resources.
Answer: because of failing institutions

18. Many mergers arise from expected . This takes place particularly when the
acquired firm has earnings losses that can be used offset taxable profits of the acquirer.
Answer: tax benefits

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 19. A bank may increase future earnings by . The bank can achieve greater
efficiency by consolidating operations and unnecessary duplication.
Answer: improving operating efficiency

20. When a bank expands the number of service options it offers after acquiring another financial
firm they have practiced .
Answer: product line diversification

21. When a bank enters into a new market area as the result of a merger with another financial
institution they have practiced .
Answer: geographic diversification

22. When a national bank wants to acquire another bank they must apply to the for
approval.
Answer: Comptroller of the Currency

23. The degree of in a market is measured by the proportion of assets

controlled by the largest institutions serving that market. In banking this is measured but the
Herfindahl-Hirschman Index.
Answer: concentration

24. The executive body of the EU has emerged as a key arbiter if mergers involving European
businesses and uses the doctrine of .
Answer: collective dominance

25. When a merger takes place some banks have been asked to themselves of
some of their branches. Many of these are sold to third parties.
Answer: divest

True/False Questions

T F 26. In recent years banking has ranked in the top five of all U.S. industries in the number of
reported merger transactions.
Answer: True

T F 27. If a bank with a higher stock-price-to-earnings ratio acquires a bank with a lower price-
earnings ratio, earnings per share of the combined organization will increase even if
combined earnings fall after the merger.
Answer: False

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 T F 28. In recent years in the United States bank merger premiums have commonly ranged from
150 to 250 percent.
Answer: True

T F 29. According to the textbook the financial success of a bank merger depends heavily upon
the comparative dollar amounts of earnings reported by the two banking organizations
and their relative price-earnings ratios.
Answer: True

T F 30. A proposed merger between two or more banks must be ratified by the board of directors
of each bank involved and by the management of each of the banks and then the merger
can proceed once regulators' approval is received.
Answer: False

T F 31. Under the terms of the Bank Merger Act each federal agency must give top priority to the
competitive effects of a proposed merger.
Answer: True

T F 32. Mergers with anticompetitive effects can only be approved at the federal level if one of
the banks involved is failing.
Answer: False

T F 33. A market area served by one bank which is the only provider of financial services in that
market would have an HHI of 100 percent.
Answer: False

T F 34. A market served by just two banks, equal to each other in size, would have an HHI of
5,000.
Answer: True

T F 35. According to a recent survey, many European bank mergers in the 1980s and 1990s were
motivated by the search for cost savings (economies of scale).
Answer: True

T F 36. The acquisition of First City Bancorporation of Texas by Chemical Bank of New York
was motivated by both banks seeking market-positioning benefits.
Answer: False

T F 37. The merger of Bank of America and Security Pacific in 1992 resulted in an expansion of
branch offices at both banks.
Answer: False

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 T F 38. Under the purchase-of-stock method the acquired bank ceases to exist as a separate
corporation.
Answer: True

T F 39. Bank executives identify the most important factor in choosing a merger target as the
ability of the merged bank to better accommodate their corporate customers.
Answer: False

T F 40. One of the major motives behind the rapid growth of mergers in recent years is that
stockholders expect the profit potential will increase once the merger is completed.
Answer: True

T F 41. Some merger partners anticipate reduced earnings risk as a result of the merger. One
reason for this may be that the merger opens up new markets with different economic
characteristics.
Answer: True

T F 42. If one of the banks is in financial difficulty a merger is not allowed to take place.
Answer: False

T F 43. The passage of the Garn-St. Germain Depository Institutions Act allowed bank holding
companies to acquire failing banks and thrifts in other states.
Answer: True

T F 44. The most important goal of any merger should be to increase the market value of the
surviving firm.
Answer: True

T F 45. Mergers with anticompetitive effects cannot go unchallenged by federal authorities unless
the banks can show that the resultant bank would have significant public benefits.
Answer: True

T F 46. As a result of many bank mergers, research indicates that goodwill on many bank balance
sheets has exploded in recent years.
Answer: True

T F 47. According to FASB, goodwill must now be amortized over its useful life.
Answer: False

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 T F 48. In order to get regulatory approval for a merger, many times banks have been required to
open up a number of new branch offices.
Answer: False

T F 49. A 2002 study by the Federal Reserve indicates that there are economies of scale (cost
savings) resulting from small mergers among banks and insurance companies.
Answer: True

T F 50. There is no evidence for cost savings resulting from large financial institution mergers.
Answer: True

T F 51. Recent research indicates that some merger activity may actually stimulate "de novo"
bank entry into the marketplace.
Answer: True

T F 52. The 2007 credit crunch resulted in numerous banks experiencing financial distress for
which mergers and acquisitions were often the only option.
Answer: True

T F 53. The agency problem described in the textbook is referred to the idea of bank managers
driven primarily by their own interest to increase salaries and benefits at the expense of
company stockholders.
Answer: True

T F 54. One of the most common motives for large banks to acquire smaller banks is to gain
access to capable new management which is always in short supply at larger institutions.
Answer: False

T F 55. Bank regulators may challenge the merger between two institutions but can never require
banks to divest themselves of some of their offices in order to secure regulators’ approval.
Answer: False

Multiple Choice Questions

56. According to the literature on bank mergers these mergers are often motivated by:
A) Their profit potential
B) Expected reduction in the risk of fluctuations in cash flow and earnings

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 C) Expected tax benefits
D) All of the above.
E) None of the above.
Answer: D

57. According to the research literature, the principal beneficiaries of most bank mergers appear to
be:
A) The stockholders of the bank acquired
B) The stockholders of the acquiring bank
C) The public (in the form of new services offered and lower service fees)
D) The staff of the acquired bank
E) None of the above.
Answer: A

58. According to the research literature, the lackadaisical profit performance surrounding a merger
may be explained by the following:
A) Managerial hubris
B) The sizeable merger premium that acquirers have to pay to shareholders of the acquired firms
C) Accounting irregularities when reporting earnings of the combined entity
D) All of the above
E) A and B only
Answer: E

59. The ratio of the acquired bank's current stock price per share plus the additional amount paid by
the acquirer for each share of the acquired bank's stock divided by the acquired bank's current
stock price is the:
A) Price-earnings ratio
B) Merger premium
C) Exchange rate (of a merger transaction)
D) Combined stock price of the merging banks
E) None of the above.
Answer: B

60. The danger faced by the stockholders of an acquiring firm in a merger if an excessive number of
new shares are issued relative to the value of their old shares is known as:
A) More volatile earnings
B) Reduction of the exchange ratio
C) Dilution of ownership
D) Increased risk of bankruptcy
E) None of the above
Answer: C

61. The federal law that requires each U.S. merging bank to notify its principal federal regulatory
agency and request approval before a merger can take place is the:
A) Bank Merger Act

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 B) Glass-Steagall Act
C) Depository Institutions Deregulation and Monetary Control Act
D) Garn-St Germain Depository Institutions Act
E) Gramm-Leach-Bliley Act
Answer: A

62. A merger may increase the bank's expected future earnings or reduce its level of risk exposure
by:
A) Improved operating efficiency.
B) Improved earnings per share.
C) Geographic or product diversification.
D) All of the above.
E) A and B, only.
Answer: D

63. The Herfindahl-Hirschman Index is a measure of:

A) Market concentration.
B) Merger premium.
C) Synergy gained from a merger.
D) All of the above.
E) None of the above.
Answer: A

64. There are three banks in East Panhandle. First National Bank currently has 40 percent of the
deposits, while Second State Bank currently has 30 percent, as does New State Bank and Trust.
What is the Herfindahl-Hirschman Index for East Panhandle?
A) 100.
B) 1200.
C) 3400.
D) 2400.
E) None of the above
Answer: C

65. There are three banks in East Panhandle. First State Bank currently has 25 percent of the deposits,
while Second State Bank currently has 40 percent. What is the Herfindahl-Hirschman Index for
East Panhandle (compute the share of Third State Bank first)?
A) 100.
B) 2200.
C) 3450.
D) 3640.
E) None of the above
Answer: C

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 66. There are three banks in East Panhandle. First State Bank currently has 25 percent of the deposits,
while Second State Bank currently has 40 percent. Compute the share of the Third State Bank in
the market and use the Department of Justice Guidelines to identify this market as:
A) Unconcentrated
B) Mildly concentrated
C) Moderately concentrated
D) Concentrated
E) Excessively concentrated
Answer: D

67. There are three banks in East Panhandle. First State Bank currently has 25 percent of the
deposits, while Second State Bank currently has 40 percent. Compute the share of the Third State
Bank in the market. Suppose First State and Third State propose to merge in order to compete
with Second State Bank. According to the Department of Justice Guidelines, would this merger
be allowed?
A) Yes
B) Yes but with certain regulatory restrictions
C) No
D) Not enough information to make the determination
E) None of the above
Answer: C

68. First National Bank's stock is currently selling at $40 per share and the bank recently reported
earnings per share of $4.50 for its 200,000 shares. Second National Bank has 150,000 shares
outstanding, with a current market price of $30 per share. Second National just reported its
earnings per share of $5. If First National acquires Second National in a stock purchase, with the
two banks agreeing to exchange stock at the current market prices, and post-merger earnings are
expected to be $1,800,000, what will the post-merger EPS be?
A) $4.36
B) $5.76
C) $5.28
D) $5.14
E) None of the above
Answer: B

69. Recent research on interstate bank mergers suggests that:

A) Earnings increased
B) Employee productivity improved
C) Faster growth ensued
D) All of the above.
E) None of the above.
Answer: D

70. Suppose Bank A's stock price is $75 and Bank B's stock price is $25. Bank A is planning on
purchasing Bank B and plans on paying Bank B shareholders a bonus of $10 per share. What is
the merger premium that Bank B shareholders will receive?
A) 110 percent

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 B) 46.6 percent
C) 200 percent
D) 140 percent
E) None of the above
Answer: D

71. Suppose Bank A's stock price is $75 and Bank B's stock price is $25. Bank A is planning on
purchasing Bank B and plans on paying Bank B shareholders a bonus of $10 per share. If Bank
B has 100,000 shares outstanding, how many shares of Bank A will the shareholders of Bank B
receive?
A) 100,000 shares
B) 33,333 shares
C) 46,667 shares
D) 214,286 shares
E) None of the above
Answer: C

72. The most important goal of any merger should be to:

A) Increase the market value of the surviving firm
B) Reduce the risk of the surviving firm through geographic diversification
C) Increase managerial compensation
D) Increase the efficiency of the target firm
E) None of the above
Answer: A

73. Which of the following are reasons that bank mergers do not work?
A) Ill-prepared management
B) A mismatch of corporate cultures
C) Excessive prices paid by the acquirer for the acquired bank
D) A failure to take into account customers' feelings and concerns
E) All of the above are reasons bank mergers do not work
Answer: E

74. Andover Bank is thinking about purchasing Berkley Bank. The current market value of
Andover's stock is $55 per share. The current market value of Berkley's stock is $15 per share
and Andover is planning on paying Berkley's stockholders a $5 bonus per share. Currently,
Andover has 100,000 shares outstanding and earnings per share of $12. Currently, Berkley has
50,000 shares outstanding and earnings per share of $5. What is the market premium that
Andover is paying on Berkley's shares?
A) 367 percent
B) 275 percent
C) 133 percent
D) 100 percent
E) None of the above
Answer: C

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 75. Andover Bank is thinking about purchasing Berkley Bank. The current market value of
Andover's stock is $55 per share. The current market value of Berkley's stock is $15 per share
and Andover is planning on paying Berkley's stockholders a $5 bonus per share. Currently,
Andover has 100,000 shares outstanding and earnings per share of $12. Currently, Berkley has
50,000 shares outstanding and earnings per share of $5. What is the exchange ratio for this
transaction?
A) 3:11
B) 4:3
C) 5:2
D) 4:11
E) None of the above
Answer: D

76. Andover Bank is thinking about purchasing Berkley Bank. The current market value of
Andover's stock is $55 per share. The current market value of Berkley's stock is $15 per share
and Andover is planning on paying Berkley's stockholders a $5 bonus per share. Currently,
Andover has 100,000 shares outstanding and earnings per share of $12. Currently, Berkley has
50,000 shares outstanding and earnings per share of $5. What should the total number of shares
outstanding be in the new bank?
A) 118,182 shares
B) 150,000 shares
C) 166,667 shares
D) 200,000 shares
E) None of the above
Answer: A

77. Andover Bank is thinking about purchasing Berkley Bank. The current market value of
Andover's stock is $55 per share. The current market value of Berkley's stock is $15 per share
and Andover is planning on paying Berkley's stockholders a $5 bonus per share. Currently,
Andover has 100,000 shares outstanding and earnings per share of $12. Currently, Berkley has
50,000 shares outstanding and earnings per share of $5. Suppose that the earnings of the new
bank are $1,600,000 and the combined bank will have 118,182 shares outstanding. What will the
earnings per share of the new bank be?
A) $17.00 per share
B) $13.54 per share
C) $9.67 per share
D) $12.27 per share
E) None of the above
Answer: B

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 78. Andover Bank is thinking about purchasing Berkley Bank. The current market value of
Andover's stock is $55 per share. The current market value of Berkley's stock is $15 per share
and Andover is planning on paying Berkley's stockholders a $5 bonus per share. Currently,
Andover has 100,000 shares outstanding and earnings per share of $12. Currently, Berkley has
50,000 shares outstanding and earnings per share of $5. Suppose the earnings of the combined
bank do not increase over the total earnings of the two banks before the merger. In addition
assume that the new bank will have 118,182 shares outstanding. What will the earnings per share
of the new bank be?
A) $17.00 per share
B) $13.54 per share
C) $9.67 per share
D) $12.27 per share
E) None of the above
Answer: D

79. Suppose there are four banks in a local community. Each of these banks has 25 percent of the
deposits in this community. What is the Herfindahl-Hirschman Index (HHI) for this community?
A) 10,000
B) 100
C) 2500
D) 625
E) None of the above
Answer: C

80. Suppose there are four banks in a local community. Each of these banks has 25 percent of the
deposits in this community. This market is:
A) Unconcentrated
B) Mildly concentrated
C) Moderately concentrated
D) Concentrated
E) None of the above
Answer: D

81. Suppose there are four banks in a local community. Each of these banks has 25 percent of the
deposits in this community. Calculate the change in the Herfindahl-Hirschman Index (HHI) if
two of these banks merge.
A) 625
B) 1000
C) 1150
D) 1200
E) 1250
Answer: E

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 82. In the United States, most bank mergers have occurred in the following geographic region of the
country:
A) Southeastern U.S.
B) Northeastern U.S.
C) The West
D) The Midwest
E) Southwestern U.S.
Answer: A

83. Research indicates economies of scale (cost savings) for financial institution mergers which
are:
A) Small
B) Large
C) Medium
D) All sizes
E) No economies of scale have been found
Answer: A

84. Dorchester County has the following five banks in its market area.

Bank Total Assets

First National Bank, NA $1,500 million
Dorchester County Bank $750 million
First State Bank $500 million
Summerfield Bank $250 million
Charlestown Bank $250 million
All Banks $3,250 million

Using this information, what is the market share of the First National Bank?
A) 100.00%
B) 75.00%
C) 46.15%
D) 15.38%
E) None of the above
Answer: C

85. Dorchester County has the following five banks in its market area.

Bank Total Assets

First National Bank, NA $1,500 million
Dorchester County Bank $750 million
First State Bank $500 million
Summerfield Bank $250 million
Charlestown Bank $250 million
All Banks $3,250 million

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13
 Using this information, what is the Hirfindahl-Hirschman Index for this market
area?
A) 3017
B) 5000
C) 10,000
D) 3,187,000
E) None of the above
Answer: A

86. Dorchester County has the following five banks in its market area.

Bank Total Assets

First National Bank, NA $1,500 million
Dorchester County Bank $750 million
First State Bank $500 million
Summerfield Bank $250 million
Charlestown Bank $250 million
All Banks $3,250 million

If the Summerfield and Charlestown banks merge, what would be the

Hirfindahl-Hirschmann Index after the merger?
A) 3017
B) 3136
C) 5000
D) 10,000
E) None of the above
Answer: B

87. There are 10 banks in a particular market area all with a market share of
10%. What is the Hirfindahl-Hirschmann Index for this market area?
A) 10,000
B) 5000
C) 1000
D) 0
E) None of the above
Answer: C

88. There are 10 banks in a particular market area all with a market share of
10%. Two of the banks plan to merge. What would the Hirfindahl-
Hirschmann Index be after the merger?
A) 5000
B) 1200
C) 1000
D) 0

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 E) None of the above
Answer: B

89. There are 10 banks in a particular market area, all with a market share of
10%. Two of the banks plan to merger and the Hirfindahl-Hirschmann Index
moves from 1000 to 1200. Would the Justice Department likely bring suit
against the merger?
A) Yes
B) No
C) Only if the banks divest themselves of half of their branches
D) Cannot be determined from the information given
Answer: B

90. What caused there to be a wave of mergers in Europe?

A) Passage of the Riegle-Neal Interstate Banking Act
B) Passage of the Gramm-Leach-Bliley Act
C) Passage of the Bank Merger Act
D) Formation of the European Union
E) A, B and C above
Answer: D

91. The First State Bank of Wyoming wants to acquire the First State Bank of
Oklahoma. The management of the bank feels that this geographic
diversification will increase earnings as new markets will be exploited and
new services are offered to all of their bank customers. Which motive for a
merger does this most likely reflect?
A) Profit Potential
B) Risk Reduction
C) Rescue of Failing Institution
D) Tax and Market-Positioning
E) Maximizing Management Welfare
Answer: A

92. The First State Bank of Wyoming wants to acquire the Second National Bank
of South Carolina. They want to do this because management feels that
South Carolina faces very different economic conditions than does Wyoming
and that this acquisition will reduce variability in earnings in the future. What
motive for a merger does this most likely reflect?
A) Profit Potential
B) Risk Reduction
C) Rescue of Failing Institution
D) Tax and Market Positioning
E) Maximizing Management Welfare
Answer: B

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15
 93. The First National Bank of Edmond wants to acquire the First State Bank of
Oklahoma City. Management believes that this merger will enhance their
reputation in the labor market because the new firm will be twice as big as
what they are managing now. In addition, the First National Bank of Edmond
has promised to pay $10,000,000 in compensation to the top managers of
the First State Bank of Oklahoma City and help them cover any resulting tax
liability. What motive for a merger does this most likely reflect?
A) Profit Potential
B) Risk Reduction
C) Rescue of Failing Institution
D) Tax and Market Positioning
E) Maximizing Management Welfare
Answer: E

94. The First National Bank of Edmond had decided to purchase The First National
Bank of Plano in Texas. The bank is interested in this purchase because The
First National Bank of Plano is in financial distress and the First National Bank
of Edmond thinks this is a cheap way to get a start in the large Texas market.
The FDIC supports this acquisition because they won’t have to make any
insurance payouts. What motive for a merger does this most likely reflect?
A) Profit Potential
B) Risk Reduction
C) Rescue of Failing Institution
D) Tax and Market Positioning
E) Maximizing Management Welfare
Answer: C

95. The State Bank of Stillwater has had record profits this year. They are
interested in purchasing the National Bank of Durant because they have had
losses this year. The State Bank of Stillwater feels that they can turn around
the National Bank of Durant and in the meantime they can enjoy a reduced
tax burden after this acquisition. What motive for a merger does this most
likely reflect?
A) Profit Potential
B) Risk Reduction
C) Rescue of Failing Institution
D) Tax and Market Positioning
E) Maximizing Management Welfare
Answer: D

16 Test Bank, Chapter 19