Banks play the central role in economic development and in credit process, this process of financial consolidation has attracted the attention of not only the shareholders or mangers but also the policy makers and borrowers. In recent years the Mergers & Acquisitions (M&As) have swept through the entire financial services sector. The distinction between the financial services sectors has been blurred between activities such as insurance, lending's, asset management, and investment banking; intense competition is created within the financial sector by cutting costs and expanding business often by merging with the competitor or by acquisition. According to Focarelli, D. et.al (2002) main reason for banking mergers is due to deregulation & technological innovations. The European central bank defines mergers as "two or more companies joining together, and a new entity can be at holding or a company level" it defines Acquisition as "A company buying shares in another company to achieve a managerial influence, it may be of a minority or of a majority of the shares in the acquired company." This report is structured in three sections. Section 1 aims to understand the motives of Mergers & acquisition between a Retail bank and an Investment bank. Section 2 aims to point out the benefits to M&As. Section 3 points out drawbacks to M&As.
Section - 1 (Motives to Mergers & Acquisition)
Different researchers have given different motives to M&As as per P. Rose, & S. Hudgins, (2010) The main motives are i) To increase the shareholders wealth. There are huge expectations from the shareholders that the profits of the company would increase on merger, if the managing staffs of an acquiring company are more skilful. To some extent this is true of international mergers. ii) Reduce the risk exposure by increasing their welfare, merger helps to reduce risk by increasing the overall size and opens new market with different economic characteristics. iii) Higher salary expectations from managers and employees of the company, or greater job security, or prestige from managing larger firms, iv) To earn tax benefits, v) To obtain power in the market, or motive to reduce cost, it is often been argued that when two companies merge together it makes it more stronger, powerful, and reduces the operating cost, vi) To rescue a failing institution, this is often been motivated by the regulatory bodies or central banks of a country as to rescue the failing bank to merge with the other successive bank, to avoid interruption of customer service and to conserve the central reserves. Some other motives are given by P.Steiner (1977) Merger motives to limit competition and achieve monopoly profits, it even motivates to overcome critical lackness to owns company. A. Thakor, et.al (1999) says that when banks are uncertain about what skills are needed in future, mergers allow them to diversify into different activities that could give high potential profits and new skills.
Section - 2 Benefits of M&As
According to Bruner, R. (2004) "M&As is one of the most important means by which companies respond to changing conditions" merger between a Retail bank and investment bank could be very much advantageous for both; as retail bank concentrates on services to individuals and small businesses whereas investment bank concentrates on institutional clients. The main advantage to investment bank is that it gets access to relatively low cost funds via less interest sensitive consumer accounts, investment bank channels those deposited funds into corporate loans. (P. Rose, & S. Hudgins, 2010). The other benefit is the economies of scope, banks that have merged are in better position to reduce their operational cost. Some more benefits could be noted of mergers which are advantageous to both, retail bank and the investment banks are when banks come together it increases on their customer counting, so more products could be sold in the market and it helps to understand the market trends and helps to manage the risk more efficiently. Merger is often seen as a quick way to grow/expand rather than setting up a new company. The other benefits of the mergers to retail bank is it helps to better manage the liquidity risk, and cash reserves. A merger increases the number of staff, product line, increases the geographical area, replaces the inefficient managers, increases the profits, and creates a competitive market. The other main benefit from the merger is to the shareholders, as they experience high earnings per share, and even a merger premium is been paid out. When bank of America merged with Merrill Lynch it paid out 70% more than the closing stock prices to Merrill lynch shareholders, for merger to go ahead. (www.bloomberg.com)
Section - 3 Drawback of M&As
Been having so many advantages there are some drawbacks to M&As. Kenneth Lewis, CEO of Bank of America says that Investment banks are too exposed to risk, and secure most of their finance from capital markets, but during the economic downturn when the capital markets freeze, Investment banks are the first to suffer. (www.reuters.com). Some other disadvantages are, M&As may create a monopoly and could be dominated by few banks, and could abuse the market power. The other disadvantage we could see from the current crisis is the overdependence on securitisation, banks used securitisation as a major tool to expand and transfer risk, these MBS, CDO's were purchased by investment banks and when there were defaults huge losses were suffered by investment banks. Other disadvantages could be given is there could be clash of culture between different business types. Mergers are not always proved to be successive and easy, the most recent e.g. we could take of is the merger between bank of America and Merrill lynch where there were complications with staff bonuses and debt. M&As could be costly due to legal expenses of acquiring a new company which may not be profitable in initial years. There could be larger potential for systemic risk, arising of higher concentration on M&As.
M&As is seen as a positive tool for growth by the companies but it is not always so, many times the M&As are unsuccessful. As per Indian Institute of Banking & finance only 34% of M&As turned to be positive and have managed to increase the shareholders wealth. But yet companies do take all opportunity for M&As, looking at recent crisis many of the companies have taken this path to survive. Companies like J.P.Morgan merger with Chase Manhattan Corp & Bank one, Bank of America with Merrill lynch, RBS with Direct line, Bank of New York with Mellon, Wachovia Bank with Wells Fargo, etc. there are innumerable companies which have taken M&As path with the hope of growth, and have been successive.
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