The Impact of Past Syndicate Alliances on the Consolidation of Financial Institutions Claudia Champagne and Lawrence Kryzanowski * The impact of past syndicate alliances on the consolidation of financial institutions is examined. The odds of two lenders combining increases with the intensity and exclusivity of their prior syndicated loan alliances. The impact is higher for international mergers and acquisitions (M&As) and for prior syndicate co-relationships where the acquirer and target were participant and lead, respectively. The odds of a particular lender being a target decreases as its return on equity (ROE) and earnings/price (E/P) ratios increase and as its size and growth opportunities decrease. The intensity and exclusivity of the syndicated loan alliances leading up to M&A announcements are significantly higher for non-US versus US M&As. The significantly lower short- and long-term performances for both acquirers and targets with prior syndicate co-involvements disappear in the presence of control variables that account for the less frequent use of cash payments, the greater incidence of divestitures, and the higher percentage of shares acquired through their M&As. Acquirers with versus those without past syndicate target co-involvements exhibit greater outperformance for control-firm benchmarked ROEs and lower underperformance for control-firm and prior-to-M&A benchmarked ROEs. The ongoing consolidation of financial institutions within and across national boundaries has generated considerable interest among academics and practitioners due to the size, importance, and role of such institutions in the economy of most countries. A growing body of literature deals with mergers and acquisitions (M&As) in the financial services industry. 1 Rhoades (2000) finds that approximately 8,000 M&As involving about $2.4 trillion in acquired assets occurred in the United States between 1980 and 1998 (about half during the 1995-1998 period) and that several mergers during the 1990s were the largest bank M&As in US history. A report by the Group of Financial support from the Concordia University Research Chair in Finance, National Research Program on Financial Services & Public Policy at York University Dissertation Grant, IFM2, SSHRC, and SSQRC-CIRP ´ EE are gratefully acknowledged. We would like to thank Bryan Campbell, Ed Kane, Jean Roy, Ian Rakita, and the discussant (Jacques Pr´ efontaine) and participants at the presentation of an earlier version of this paper at the 2006 meetings of the NFA (Montreal) and FMA (Salt Lake City, “top 10%” session) for their many helpful comments. We are thankful to the editor and an anonymous referee for their perceptive comments and recommendations that greatly improved the contents of the paper. We also thank Sybil Murray-Denis for her excellent professional editing. The usual disclaimer applies. ∗ Claudia Champagne is an Assistant Professor of Finance at Sherbrooke University in Sherbrooke, Canada. Lawrence Kryzanowski is the Concordia University Research Chair in Finance at Concordia University in Montreal,Canada. 1 Some recent examples include: Amel, Barnes, Panetta, and Salleo (2004) who provide a review of the extensive literature on the efficiency gains from bank M&As; Karceski, Ongena, and Smith (2005) who examine the impact of M&As on corporate bank borrowers in Norway; Black, Bostic, Robinson, and Schweitzer (2005) who examine the market and profitability impact of M&As between bank holding companies; Ismail and Davidson (2005) who examine the market impact of intra- and cross-pillar bank M&As in Europe; and Buch and DeLong (2004) who analyze the determinants of international bank mergers. Financial Management • Autumn 2008 • pages 535 - 569