Integration and Information Technology Effects on Merger Value in the U.S. Commercial Banking Industry

I study the effect of integration and information technology (IT) investment on the value derived from 118 mergers in the U.S. banking industry. I quantify integration scale on a per-merger basis and examine its effect on long-term changes to acquiring firms’ performance. I also examine the effect of ex ante integration risk on stock market reactions to merger announcements. While, in theory, merger integration processes are supposed to lead to greater cost efficiency, some researchers have argued that integration processes can be disruptive to firm performance. The empirical results suggest that neither profitability nor cost efficiency improves with the scale of integration processes and that cost efficiency becomes worse as the scale of integration increases. However, the results also show that integration processes are more beneficial to acquiring firms with greater IT investment. Moreover, the results show that acquirers’ investments in IT mitigate the potentially negative effects of integration risk on stock market reactions to merger announcements. These results highlight the role of IT in facilitating large-scale merger integration processes.