The Value Added By Bank Acquisitions: Lessons From Wells Fargo'S Acquisition Of First Interstate

Wells Fargo's recent acquisition of First Interstate Bancorp represents one of the relatively uncommon cases in which the economic values of both the acquiring and acquired banks increased sharply upon announcement of the deal. The transaction is also one of the few cases where the bidder in a major bank acquisition chose purchase instead of pooling accounting–despite the fact that the deal was openly hostile and that Wells Fargo had to fight off a competing bid from First Bank Systems. Based on the stock market's reaction to this merger battle, as well as the results of their study of 153 bank mergers over the period 1985–1991, the authors argue that the most promising mergers are those presenting large opportunities to reduce costs by eliminating redundant operations. The stock market is much less responsive to other merger rationales such as diversification or entry into new markets in pursuit of growth. The Wells case also suggests that a preoccupation with the accounting treatment of a merger is a mistake if it becomes the primary reason for turning down a deal that creates economic value, or if it prevents the bidder from choosing the lowest‐cost method of financing the deal. Throughout the bidding contest for First Interstate, the stock market responded positively to the success of Wells Fargo's efforts, even though purchase accounting would have a large adverse impact on reported earnings. But if the stock market does not appear to care about the accounting treatment of a merger, the method of financing does appear to matter to investors. In general, acquisitions financed with cash are viewed more favorably by the market than stockfunded transactions. The evidence also suggests, however, that acquiring firms can reduce the negative impact of stock deals by making conditional offers (those in which the number of shares depends on the stock price performance of the acquirer) and by combining such offers with stock repurchase programs.