"For years the Italian banking system was described as a petrified forest—gloomy, immobile and rooted firmly in the past", thus wrote The Economist, Britain's most influential weekly, in its August 31, 2006 edition. The last time the Italian banking sector had seen any sort of reform was as far back as the 1930s. In 1936, Benito Mussolini introduced major reforms in the country's banking sector, and consequently, the Banking Law came into force. However, over the next five decades or so, the structure of Italy's banking system had become highly fragmented. Further, the market had remained a localized one, and legal restrictions prevented mergers from taking place between different categories of banks. According to experts, the country's bank regulations, at best, was characterized by heavy structural controls, barriers to entry, and restraints on assets and liabilities, as regulators in many European countries thought that restraining competition would help to keep the bank rates to levels favorable to bank profitability.

However, during the 1990s, as sweeping changes had begun to take place in the global banking arena, including Europe, policymakers in Italy were aware of the challenges it would pose to the banks in their own backyard if they did not move swiftly. The early 1990s saw Italy launch an ambitious drive to merge some of its biggest banks to enable them to compete in the post-1992 single European market. "The legislative framework was laid for a major reform of the Italian banking market, including privatization and abolition of operational specialization. This represented the most revolutionary change in the Italian banking system since Benito Mussolini's bank reforms of 1936", says a report by Sydbank. The consolidation process has continued in the 2000s as well. According to Italy's Mediobanca, from 1998 to 2005, 47 `mega mergers' took place worldwide, 21 of which involved European banks. During the same period, Italy also saw a spate of bank consolidations in the country. Some 500 banks were involved in the ensuing consolidation process, which culminated in the creation of several large banking groups in 1996, as per the Sydbank report. In a recent merger, in 2007, UniCredit and Capitalia merged to form the second largest banking group in Europe, and the sixth largest in the world.

Against this backdrop, the current issue of this journal carries the research paper, "Valuations of Banks in Mergers" by Luca Francesco Franceschi, which offers insights into principle methodologies governing valuations in mergers in the Italian banking sector, in order to identify the exchange ratio, and describe the most significant criteria and methods. The author says that in mergers, it is important and significant to determine the exchange ratio. Although the exchange ratio is always the result of complex negotiations between the parties involved, the transaction needs to begin with the consideration of the intrinsic value of each company concerned, and be representative of the relevant stand-alone value. The author analyzes the diverse approaches used by professional practice (i.e., Italian Chartered Accountants), which generally gives priority to analytical methodologies based on the fundamental analysis of a company, and financial brokers, who prefer using the values recorded from the market. The knowledge required for the context in which the merger operations of important corporations are conducted, means that a plurality of information is required by administrators to define the exchange ratio, says the author. He finds that consultants involved in the transactions have used several methods and established several exchange ratios. However, the market methods were used the most. Since the analytical methods require much more information than the market methods, for an outside analyst, it may not be easy to find or valuate. In case of the consultants who work alongside banks in mergers, they may access all internal information useful for the application of the analytical methods. This is the main reason why the DDM—`excess capital' was the method most used. The author concludes that the premise of being able to value a bank is not only in knowing the different theoretical and applicative valuation methods, but also in having a detailed knowledge of bank activities in order to adapt the models for their valuation to the specific context, subject to the analysis.

The second research paper, "Takeovers and Bidding Firms' Shareholder Returns: Thai Evidence" by Amporn Soongswang, features the impact of takeovers on the Stock Exchange of Thailand. The author investigates the bidding firm's performances during a period of 12 months before and after the takeover. The study measures abnormal returns using an event study approach, applying two models and three parametric test statistics. The author's findings suggest that Thai successful takeover effects are creating wealth for the bidding firm's shareholders. The examination of after the announcement month shows positive rather than negative abnormal returns, suggesting that the bidding firm's shareholders' wealth is persistent. The study also provides new evidence indicating that the market positively responds to takeover news four and three months prior to the announcement month, leading to the abnormal returns of approximately 4.25% and 3.03% per month, depending on the metric, for the bidders.

- Amit Singh Sisodiya
Consulting Editor