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 be reasonably
placed. It is, however, the responsibility and duty of the
firm's administrators concerned with the merger, to establish
the definitive exchange ratio. Valuations of banks in mergers
are carried out, taking into account 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, the 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), are
also illustrated; 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.
In recent times, and more precisely between 2002 and 2007,
several aggregations in the form of mergers or acquisitions
have taken place in the Italian banking market, allowing
for greater competitiveness within Italian banks and with
those in other European countries, and beyond.In
the operations, key mergers in terms of importance and significance
were examined (dealt with in § 1). The consultants
in charge of identifying a reasonable exchange ratio, in
support of company administrators, used different criteria
and valuation methods to assess the value (defined as the
`intrinsic value' or `equity value') of the banks concerned.
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