US BANK MERGERS

US Bank Mergers

US Bank Mergers

Merger and Acquisition

Over the past decade, the banking industry has experienced an unprecedented level of consolidation as mergers and acquisitions among large financial institutions have taken place at record levels (Sainsbury, 2008).

Merger and acquisition activity results in overall benefits to shareholders when the consolidated post-merger firm is more valuable than the simple sum of the two separate pre-merger firms. The primary cause of this gain in value is supposed to be the performance improvement following the merger. The research for post-merger performance gains has focused on improvements in any one of the following areas, namely efficiency improvements, increased market power, or heightened diversification (Sainsbury, 2008).

Bank merger and acquisition activity may also encourage improved revenue efficiency in a manner analogous to cost efficiency. Some recent deals, such as Westpac Bank and St. George Bank, have been motivated by potential gains in this area (Abraham, Deo & Irvine, 2008). According to this view, scale economies may enable larger banks to offer more products and services, and scope economies may allow providers of multiple products and services to increase the market share of targeted customer activity. Additionally, acquiring management may raise revenues by implementing superior pricing strategies, offering more lucrative product mixes, or incorporating sophisticated sales and marketing programs (Nguyen & Kleiner, 2003). Banks may also generate greater revenue by cross-selling various products of each merger partner to customers of the other partner.

Merger-related gains may also stem from increased market power. Deals among banks with substantial geographic overlap reduce the number of firms in markets in which both organisations compete. A related effect of in-market mergers is that the market share of the surviving organisation in these markets is raised (Williams, Michael & Rao, 2008). These changes in market structure make the affected markets more vulnerable to reduced competition. The increased market power of the surviving organisation may enable it to earn higher profits by raising loan rates and lowering deposit rates. It should be noted that antitrust policies of the Federal Reserve and Department of Justice are designed to prohibit mergers with substantially anti-competitive effects (Williams, Michael & Rao, 2008). However, to the extent that a local market can be exploited by a merger which results in substantial market power, the potential gain could be substantial. Finally, mergers may enhance value by raising the level of bank diversification (Williams, Michael & Rao, 2008). Consolidation may increase diversification by either broadening the geographic reach of an institution or increasing the breadth of the products and services offered. Moreover, the simple addition of newly acquired assets and deposits facilitates diversification by increasing the number of bank customers.

Reasons of Merger and Acquisitions

Any one of these reasons for gains from mergers is sufficient, and different ones presumably are relevant in different circumstances. Not all mergers are expected to result in cost efficiencies, nor does each one result in higher revenue or diversification gains. (Chatterjee, 2007)

The number of banks in the United States has increased greatly since the 1930's (see Appendix ...