Financial Institutions, Valuations, Mergers and Acquisitions

457 Pages·2001·1.61 MB·English

by  Zabihollah Rezaee

B u s i n e s s C u l i n a r y A r c h i t e c t u r e
C o m p u t e r G e n e r a l I n t e r e s t
C h i l d r e n L i f e S c i e n c e s B i o g r a p h y
A c c o u n t i n g F i n a n c e M a t h e m a t i c s
H i s t o r y S e l f - I m p r o v e m e n t H e a l t h
E n g i n e e r i n g G r a p h i c D e s i g n
A p p l i e d S c i e n c e s P s y c h o l o g y
I n t e r i o r D e s i g n B i o l o g y C h e m i s t r y
e
WILEY
B O O K
WILEY
JOSSEY-BASS
PFEIFFER
J.K.LASSER
CAPSTONE
WILEY-LISS
WILEY-VCH
WILEY-INTERSCIENCE
Financial Institutions, Valuations,
Mergers, and Acquisitions
Subscription Notice
This Wiley product is updated on a periodic basis with supplements to reflect important
changes in the subject matter. If you purchased this product directly from John Wiley &
Sons,Inc.,we have already recorded your subscription for this update service.
If,however,you purchased this product from a bookstore and wish to receive (1) the cur-
rent update at no additional charge,and (2) future updates and revised or related volumes
billed separately with a 30-day examination review,please send your name,company name
(if applicable),address,and the title of the product to:
Supplement Department
John Wiley & Sons,Inc.
One Wiley Drive
Somerset,NJ 08875
1-800-225-5945
For customers outside the United States, please contact the Wiley office nearest you:
Professional & Reference John Wiley & Sons,Ltd.
Division Baffins Lane
John Wiley & Sons Canada,Ltd, Chichester
22 Worcester Road West Sussex PO19 1UD
Rexdale,Ontario M9W 1L1 UnitedKingdom
[phone] (44)(243)779777
1-800-567-4797
FAX [phone]
Financial Institutions, Valuations,
Mergers, and Acquisitions:
The Fair Value Approach
Second Edition
Zabihollah Rezaee
John Wiley & Sons,Inc.
New York • Chichester • Weinheim • Brisbane • Singapore • Toronto
This book is printed on acid-free paper. (cid:2)
Copyright ©2001 by John Wiley & Sons,Inc. All rights reserved.
Published simultaneously in Canada.
No part of this publication may be reproduced,stored in a retrieval system or
transmitted in any form or by any means,electronic,mechanical,photocopying,
recording,scanning or otherwise,except as permitted under Sections 107 or 108
of the 1976 United States Copyright Act,without either the prior written
permission of the Publisher,or authorization through payment of the appropriate
per-copy fee to the Copyright Clearance Center,222 Rosewood Drive,Danvers,
MA 01923,[phone],fax [phone]. Requests to the Publisher for
permission should be addressed to the Permissions Department,John Wiley &
Sons,Inc.,605 Third Avenue,New York,NY 10158-0012,[phone],fax
[phone],E-Mail:PERMREQ @ WILEY.COM.
This publication is designed to provide accurate and authoritative information in
regard to the subject matter covered. It is sold with the understanding that the
publisher is not engaged in rendering legal,accounting,or other professional
services. If legal advice or other expert assistance is required,the services of a
competent professional person should be sought.
Library of Congress Cataloging-in-Publication Data:
Rezaee,Zabihollah,1953-
Financial institutions,valuations,mergers,and acquisitions:the fair value
approach /
Zabihollah Rezaee.—2nd ed.
p. cm.
ISBN 0-471-39449-1 (cloth:alk. paper)
1. Banks and banking—Valuation—United States. 2. Bank mergers—United
States. 3.
Sale of banks—United States. 4. Financial institutions—Valuation—United
States. 5.
Financial institutions—Mergers—United States. 6. Financial
institutions—Purchasing—United States. 7. Consolidation and merger of
corporations—Law and legislation—United States. I. Title.
HG1707.7 .R49 2001
332.1′6—dc21
00-046264
Formerly titled Commercial Bank Valuationby William D. Miller
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
About the Author
Zabihollah Rezaee is a professor of accounting at Middle Tennessee State University. He
received his B.A. degree from Iranian Institute of Advanced Accounting,his M.B.A. from
Tarleton State University in Texas, and his Ph.D. from the University of Mississippi.
Professor Rezaee holds several certifications including certified public accountant (CPA),
certified management accountant (CMA), certified internal auditor (CIA), certified gov-
ernment financial manager (CGFM),and certified fraud examiner (CFE).
Professor Rezaee has published over 130 articles in a variety of accounting, finance,
banking,and economic journals including Journal of Accounting and Economics; Journal
of Business,Finance and Accounting; Journal of Accounting,Auditing and Finance; Ad-
vances in Public Interest Accounting; Journal of Accountancy,Internal Auditors Manage-
ment Accounting; Strategy Finance; and Bankers’Economic and Investment Alert.
Active within the accounting profession and the academic and financial communities,
Dr. Rezaee has made over 120 presentations at conferences and workshops throughout the
world. He teaches financial, management, and international accounting and auditing and
has been involved in financial and management consulting with national and international
organizations including the United Nations. Dr. Rezaee has received numerous research
grants from various sources. He received the 1998 distinguished research award at Middle
Tennessee State University and the Lybrand Bronze Medal for the outstanding article in
1999 selected by the Institute of Management Accountants.
v
This book is dedicated to
the loving memory of my mother,
Fatemeh Rezaee
Contents
Acknowledgments xviii
Preface xix
Part I The Foundation:Financial Institutions,Valuations,Mergers,
Acquisitions,Regulatory and Accounting Environment 1
Chapter 1 Introduction to Financial Institutions 3
1.1 Introduction 3
1.2 Structural Changes in the Financial Services Industry 5
1.2.1 Consolidation 5
1.2.2 Convergence 7
1.2.3 Competition 15
1.3 Historical Perspective of American Banking 16
1.4 Current Trends in the Banking Industry 17
1.4.1 Changes in Regulations 19
1.4.2 Information Technology 25
1.4.3 Global Marketplace 28
1.4.4 Capital Standards 29
1.4.5 Supervisory Activities 30
1.4.6 Continuous Quality Improvement 32
1.4.7 Valuation Process 34
1.5 Conclusion 35
Chapter 2 Overview of the Valuation Process 38
2.1 Introduction 38
2.2 Valuation Services 39
2.3 Valuation Profession 41
vii
viii Contents
2.4 Attracting Valuation Clients 44
2.5 Accepting a Client 51
2.6 Pricing Valuation Services 58
2.7 Importance of the Engagement Letter 59
2.8 Planning an Appraisal Engagement 59
2.8.1 Conference with Client Personnel 59
2.8.2 Knowledge of the Business 61
2.8.3 Legal Structure 62
2.8.4 Policies 62
2.8.5 Industry and Economic Conditions 62
2.9 General Planning 64
2.9.1 General Planning Decisions to be Made 64
2.9.2 Evidence and Knowledge Obtained to Prepare
Preliminary Appraisal Plan 64
2.9.3 Procedures in Preparing the Preliminary Appraisal Plan 66
2.10 Appraiser’s Traits 67
2.10.1 Able to Function Well Under Intense Pressure 68
2.10.2 Communicate Well Both Orally and in Writing 68
2.10.3 Utilize Both Qualitative and Quantitative Data 68
2.10.4 Be Unfazed by Ambiguity and Uncertainty 68
2.10.5 Continuous Improvement of Valuation Expertise and
Skills through Ongoing Professional Education 68
2.10.6 Continuous Marketing Strategies 69
2.11 Appraiser’s Due Diligence Process 69
2.12 Conclusion 69
Chapter 3 Overview of Mergers and Acquisitions 73
3.1 Introduction 73
3.2 Historical Perspective of M & A 74
3.3 Recent Trends in M & A 74
3.4 Regulations of Bank Mergers 77
3.4.1 Antitrust Regulations 78
3.5 Trends Toward Business Combinations in the Financial Services
Industry 82
3.6 Motives for Business Combinations 84
3.7 Determinants of Mergers and Acquisitions 84
3.8 Perceived Shortcomings of M & A 85
3.8.1 Diminished Services 85
3.8.2 High Financial Services Fees 88
3.8.3 Credit Availability 89
3.8.4 Undesirable Impacts on Competition 89
3.9 Studies on Mergers and Acquisitions 90
Contents ix
3.10 Mergers and Acquisitions Process 93
3.10.1 Strategy Development 95
3.10.2 Target Identification and Selection 95
3.10.3 Identifying Key Issues and Contacting Targets 99
3.10.4 Structuring the Acquisition Transaction 99
3.10.5 Due Diligence Process 99
3.10.6 Risk Assessment 100
3.10.7 Negotiation 102
3.10.8 Financial Structure 103
3.10.9 Closing the Deal 103
3.10.10 Integration 104
3.11 Conclusion 105
Chapter 4 Regulatory Environment and Financial Reporting
Process of Financial Institutions 111
4.1 Introduction 111
4.2 Consolidation 111
4.2.1 Technological Innovations 113
4.2.2 Geographical and Activity Diversification 114
4.2.3 National and Global Competition 114
4.3 Regulatory Environment 116
4.4 Bank Supervision 118
4.4.1 Market Discipline 118
4.4.2 Supervision 119
4.4.3 Minimum Capital Regulation 123
4.4.4 Safety and Soundness 126
4.5 Financial Modernization:The Gramm-Leach-Bliley Act 127
4.6 Financial Reporting Process of Financial Institutions 130
4.7 Statement of Financial Accounting Standards (SFAS) No. 115 133
4.8 Auditing Proper Classifications of Marketable Securities 135
4.9 Tax Consideration of Fair Value 136
4.10 Recent Development of Fair Value Accounting 137
4.11 Financial Reporting Requirements of Financial Institutions 143
4.11.1 Reports Required Under Regulation H and the SEC
Act of 1934 144
4.11.2 Reporting Requirement for International Activities 145
4.12 Corporate Governance of Financial Institutions 147
4.12.1 Financial Reporting 150
4.12.2 Internal Control Structure 150
4.12.3 Independent Audit Committee 154
4.12.4 Functions of Audit Committees 155
4.13 Conclusion 157