Alert February 05, 2008

FRB-Kansas City Issues Research Study Concluding That Shareholders of Banking Company Targets in Merger Transactions Obtain Highest Premiums When the Target’s Board has a High Proportion of Outside Directors

The Federal Reserve Bank of Kansas City issued a research study entitled Target’s Corporate Governance and Bank Merger Payoffs (the “Study”) that concludes, based upon a study of bank mergers from 1990 through 2004, that independent outside directors of banking companies are more likely than inside directors to make decisions regarding merger transactions that are consistent with shareholder wealth maximization.  The Study found that purchase premiums for banking company targets with a higher proportion of outside directors were higher than purchase premiums for targets with a relatively higher proportion of inside directors.  The results of the Study also support the proposition that where a banking company’s board includes a high percentage of insiders, the acquisition premium will be lower because the insiders have an inherent conflict of interest and are susceptible to trading shareholder gains “in return for their own personal benefits, such as job security and other employment-related perquisites.”  The authors of the Study stress that the benefit to shareholders of having a board with a high percentage of outside independent directors evidenced in the banking sector is consistent with the results of their analysis of boards of non-financial firms.