Acquisitions Between Banks

Free «Acquisitions Between Banks» Essay Sample

Cross-border mergers and acquisitions in the banking industry have become popular in developed and emerging countries because of the great progress made in financial liberation and technology. According, intensified banking sector deregulation and harmonization of the banking regulation practices between countries have led to the increased mergers and acquisitions in the banking industry ( Barth, Nolle & Rice 2000). The privatization and internationalization of the banking industry has also unleashed strong competitive forces that have stimulated cross-border mergers and acquisition of banks. This helps the banks to take advantage of the benefits of scale and follow customers abroad since most companies have expanded abroad in search for economic profits internationally. This helps them gain a wider market share thereby increase earnings and diversify risks.

Cross border mergers and acquisitions between banks

Merger is a process in corporate finance where two companies combine to form a new company. It is normally done by offering the stock holders of one company securities in the acquiring company in exchange of their stock. Acquisition, on the other hand, is an action in which a company purchases another company’s stakes in order to assume its full control.  It is normally done as a strategy of growth by many firms when they consider it to be beneficial to take over a firm’s operations rather than expanding on its own. It entails the creation of a new entity. A bank can buy another in either cash, stock or both. Acquiring banks which are normally large in size, more efficient and profitable always target banks with low capitalization, poor profitability and earnings, poor management quality, small in size.

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Cross border merging and acquisition between banks is a form of horizontal merger. This is because the entities in this case are involved in the same kind of business activities. Horizontal merger and acquisition is the “merger and acquisition occurring between two companies producing similar goods or offering similar services” (Gaugan 2007). Through this technique, shareholders benefit when banks make huge amounts of returns. The bank’s operating performance measured by financial ratios or estimated bank efficiency compared both the pre-merger and post-merger and revealed that the profit efficiency in large bank mergers is big (Akhavein et al. 1997) and there is no cost efficiency incurred (Berger & Humphrey 1997).

The World Investment Report (2002) has summarized the forces driving cross-border mergers and acquisitions into eight main categories: new markets, greater size, personal motive, strategic assets, financial motive, speed, diversification, and synergy.  Some of the motivations arise from “follow-your-customer” hypothesis (Miller & Parkhe 1998; Esperanca & Gulamhussen 2001) while others are due to the differences in efficiency that the target banks have with their acquirers (Berger et al. 2000).  In mature markets, the consolidation process of mergers and acquisitions is driven by market forces. The role of market forces was more dominant in mature markets while authorities played major role in consolidation process in emerging markets (Gelos & Roldos 2002). These motivating factors help banks exploit the many benefits of mergers and acquisitions and generate greater returns.

Banks generate greater value through cross-border mergers and acquisitions. The share holder value of a firm after mergers and acquisitions is often expected to be more than the combined shares of the original firms. This is through the implementation of economies of scale which causes the banks average input to fall as their returns increase. Mergers and acquisition are among the key means to achieve a larger return on production (Buch &DeLong 2004).

Consequently, the revenue of such banks expands as well as tax gain due to the wider market share they acquire through merger and acquisition. This implies the integration of networks of the target and acquirer banks with an expectation of higher non-interest income and lending growth to yield greater returns.  Moreover, there are always fair terms of trade for domestic banks in that the conditions and terms for offering services in the country, including tax rates, are low and fairer and, therefore, foreign banks prefer merging with these banks so as to enjoy fairer terms.

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The highly concentrated home markets of banks may have limited growth opportunities that are a hindrance to the development of the banks.  The banks therefore engage in cross-border merger and acquisition to exploit the growth potential in host countries (Lubliner 1994). For example, a bank that has implemented mobile banking system in its country may merge with another from a different country that has not implemented the same in order to get new markets, more revenue and increase its profits.

Finally, banks are driven to mergers and acquisitions due to its profitability. This is because the acquiring bank market capitalization explains cross-border within and across the same banking sectors. Q theory suggests that if the market value of a firm over its book value is greater than one, then the firm should increase its capital stock as investigating is profitable (Jovanovic & Rousseau 2002).

Conclusion

Merger and acquisition transactions create value to shareholders through the abnormal returns they get from their corporate ownership control, large asset and market size, method of acquisition of control, past target bank performance, and stock market movements.

     

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