Mergers & Acquisitions in Banks of USA



Mergers & Acquisitions in Banks of USA

Introduction

The trend of Bank Mergers in the U.S. Banking Industry

The trend of Bank mergers took a hike in the United States of America since the 1980s. The banks merged at the rate of 1.75 per business working day since these past two decades. Research suggests that around 8200 unassisted mergers and 1600 assisted mergers occurred in the banking industry of USA in these last two decades.

The 25 largest banks in USA hold around 70% of the major assets in the financial industry however with this increasing wave of mergers, these banks are most likely to get hold over 85% of the assets till the next decade.

The need for mergers and acquisitions is increasing due to the changing nature of the banking industry and the market forces are actually guiding these changes in the industry. If the banks do not consolidate with other banks in USA, they will be unable to compete with the other big giants that are giving intensive competition in the banking industry globally (Dymski, 2000).

However, with these mergers gaining popularity in the industry, it is also creating many problems, like managerial issues and corporate control problems, value destruction for acquired firm shareholders etc. Many argue that the primary motive of a bank merger is mainly to get the major hold over the territory, in this case industry. There are many interpretations done that also suggest that mergers on the whole increase the operating efficiency of the banking industry and enhance the value of the banks.

Reasons behind the increasing trend of Bank mergers

The banking distress in the 1980s basically gave a start to the mergers and acquisitions trend in the banking industry. And further, the changing nature of the world also had an impact on this trend.

Distress in the 1980s

Two major events contributed to the distress in the banking industry in the 1980s. First it was the ten year period of banking distress that started off in the year 1981, and then the second factor was the restrictions and the limitations on the branching of banks in the region. Banks were limited to a specific state only. They were unable to expand their business further and move beyond the defined borders to take benefit from the various market opportunities.

The thrift crisis that occurred in the banking industry in the 1980s provided opportunities to the commercial banks to utilize interstate banking assets in case of troubled loans or credit pressures. This thrift crisis made the government impose a principle in the banking industry that those institutions that are troubled and are going through a financial crisis, they should all be resolute on the basis of “least cost to the tax payer”. This basically marked the starting of “takeovers” in the banking industry.

Obviously the distress was not just limited on the thrifts of the banking industry; it had affected the commercial banks as well. The “least cost” principle was used to resolve problems for thrifts ...