May 12 was the last day of trading for Mosul Bank (BMFI) ahead of its proposed merger with Union Bank (BUOI). The stock closed up 7% bringing its year-to-date gain to 29%. BUOI ended the day unchanged and is up only 12% year-to-date.
While the deal is being described as a merger, it would in fact amount to a take-over of BUOI by BMFI. (Either way, it's a first for the Iraq Stock Exchange.) Both have the same share capital but BMFI is much larger in terms of number of branches, depost base, and the size of its loan book. (There’s more on the two banks here.)
BMFI’s strong performance relative to BUOI might thus strike one as odd. Typically, things go the other way round—if anything, the acquiree’s stock is supposed to outperform the acquirer’s. This reflects the fact that acquirers often pay too much.
There are a number of reasons for this. Acquirers may expect to realize greater synergies than are actually achievable or may underestimate the costs of integrating the merged entity. Managers may expect to benefit personally from an acquisition even though it destroys value for shareholders. Or they may simply succumb to their own hubris.
None of these things seem particularly likely in a case like the BMFI-BUOI deal. There aren’t really any synergies to consider when the target has only a few branches, nor is there much doubt about what the costs will be. Controlling shareholders, rather than managers, are calling the shots, which means that the perverse incentives facing the mangers of larger companies aren’t present. Similarly, the risk that people will be mastered by pride is a lot less when their own money is on the line.
The recent price action in the two companies, while not typical of most take-over situations, is thus not surprising. There's really no reason to expect BMFI, or any other Iraqi bank in a comparable situation, to overpay.