Valuations of Banks in Mergers
Luca Francesco Franceschi
Università Cattolica del Sacro Cuore di Milano
February 28, 2008
The valuation of the exchange ratio of banks in mergers entails the use of criteria and valuation methods to determine the intrinsic value of the enterprises concerned. Moreover, the application of several valuation methods, as is usual in professional practice, allows identifying a range of values within which the exchange ratio may reasonably be placed. It is however the responsibility and duty of the company administrators concerned by the merger to establish the definitive exchange ratio.
Valuations of banks in mergers are carried out taking account of some established general rules for the purpose of valuation and the specific context within which they are to be found. Therefore, this analysis first deals with the principle methodologies governing valuations in mergers. Subsequently, by analyzing key mergers over the 2002-2007 period in the Italian banking market, criteria and valuation methods most used by professional practice for bank valuation are identified and described, highlighting in particular their relative and specific application rules and the parameters necessary for their operative implementation.
Finally, we also illustrate those ulterior methodologies employed by professional practice for the purpose of verifying the adequacy of the exchange ratio (the so-called sanity check of results obtained by the use of these criteria and methods); methodologies which do not lead to the valuation of the intrinsic value of banks themselves because they constitute only control instruments of the relative size of the financial institutions concerned by the merger. These methods are in fact applied using both exogenous and endogenous quantitative information to express the weight of an entity with respect to another, and are therefore not included in a valuation model.
Number of Pages in PDF File: 47
Keywords: banks, valuation, merger, intrinsic value, excess capital, valuation methods
JEL Classification: G21, G34working papers series
Date posted: March 18, 2008
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