Bank Mergers

The ‘Bigger is Better’ syndrome is nowhere more apparent than in the pinnacles of the global banking industry which has seen unprecedented levels of consolidation in the belief that M&A gains can be achieved through expense reduction, increased market power, reduced earnings volatility and economies of scale and scope . The recent flurry of M&A deals stands witness to this. From the last quarter of 2003 to the second quarter of 2004, the Global Banking Industry has witnessed merger activity amounting to USD148 billion involving the Who’s Who of the Banking Industry. The main catalyst behind this activity is competition, which is being fuelled by deregulation and technology across the global banking hubs. These two forces have blurred the boundaries of time, geography, language, economies and regulations. The USD10.5 billion Royal Bank of Scotland Group (RBS) deal with Charter One Financial highlights a wave of cross-border mergers among banks.

The US Banking Industry has been consolidating for more than 10 years, during which the number of banks has reduced from 14000 to around 9000, leaving room in the regional areas for more consolidation. Historically, financial institutions in Europe have pursued growth by purchasing domestic competitors or buying into banks in other countries in business areas where they already excel. For the last two decades, cross-border bank mergers represent roughly 30 percent of all bank mergers in Europe. Britain has been relatively free of the protectionist politics that have stifled cross-border deals in other industries in Europe. A deal between Abbey National and a rival, LloydsTSB, was blocked by competition regulators in 2001, citing that combining Britain's No.4 and No.6 banks would leave customers without enough choice. Now, the only way for British banks to grow through acquisitions is to buy, or be bought by, other banks outside the country.

Rationale for Bank Mergers and Acquisitions

The  commercial banking industry has experienced an unprecedented level of consolidation in the belief that gains can be made through expense reduction, increased market power, reduced earnings volatility and scale and scope economies. The rationale for M&As can be summarized as follows:

• Cost Efficiency
• Revenue Efficiency
• Increased Market Power
• Diversification

Cost Efficiency: The most common rationale for M&A activity is believed to be increased cost efficiency. Many mergers have been motivated by a belief that a significant quantity of redundant operating costs can be eliminated through the consolidation of activities.

Revenue efficiency: Akin to cost efficiency, mergers also result in revenue efficiency by way of scale and scope economies.

Mergers can also result in increased market power. Banks may buyout each other just to enter new geographic markets or to cut down competition.

Consolidation through M&A's results in expanding the geographic reach and market penetration of banks. It will also increase the breadth of the products and services offered. This kind of diversification will result in reducing earnings volatility and increasing competitiveness through the sheer size of assets and deposits of the combined entity.

Impact of Bank Mergers and Acquisitions

The impact of merger activity results in overall benefits to shareholders as the consolidated post-merger firm is more valuable than the sum of the parts. The merged entity’s long-term operating and stock performance is solely based on the acquiring firm’s sustainable growth rate. Bank mergers are a useful market response to the forces of technological change and public policy changes. In recognition of the importance of competitive markets, the regulatory authorities prohibit mergers and acquisitions if they substantially lessen competition.

Bank mergers are usually beneficial to corporate customers. For the small business segment, bank mergers have a negative impact. According to a survey, 30 percent of small businesses (those with annual revenues between USD1 million and USD10 million) and 23 percent of mid-size businesses (annual revenues of USD10 million to USD500 million) said that mergers relating to the banks where they do business would make them consider reducing future levels of their banking business with them.

With regards to retail customers, bank mergers have a negative impact. The main reasons for the negative effect of bank mergers on retail customers according to a recent survey are given below

• Service quality deterioration
• Higher fees
• Loss of familiar branch staff
• Changed banks

With respect to mergers, conventional wisdom says that most acquisitions destroy value for the purchasers. The winners in a merger are the target company shareholders. The shareholders on the buyer’s side usually lose out along with many employees.

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