Mergers and Acquisitions in Global Financial Institutions
There is a saying that companies pay three times over for any acquisition: first for the acquisition itself; second, for the cost of making the changes necessary to realise the benefits of the acquisition; and third for the losses when the acquisition is finally sold, having failed to realise its expected benefits. This has been the pattern of many acquisitions in the financial services in Europe in the 1990’s. The most recent example in the UK has been the exit of NatWest and Barclays Bank from the field of investment banking after Big Bang. Both acquired merchant banks in the mid 1980’s with the liberalisation of the London Stock Exchange. Both
have now divested themselves, at considerable cost, of most of their investment banking activities.
Yet, the appetite of financial institutions for mergers and acquisitions remains undiminished. Merger activity among financial (and other) institutions in the US and Europe has accelerated dramatically in the past 18 months. Last year, Swiss Bank and Union Bank of Switzerland joined forces to form UBS, the world’s biggest financial institution with end 1997 assets of $69bn. NationsBank and BankAmerica also announced a merger in October, creating a new BankAmerica, with one in eight US bank deposits.
There was a brief pause as the Asian and Russian crises worked their way through to the markets in the latter part of 1998, most notably with the announcement of the $10bn acquisition of Bankers Trust by Deutsche Bank. In the market’s view, merging is still a process that makes most sense at the end of the
20th Century. Whether this will continue to be its view in the 21st Century is questionable. Much will depend on whether the factors which are driving the current spate of mergers remain the same. There is a common agreement about the underlying general causes of consolidation. These include advances in electronic data processing and telecommunications, the disintermediation process, and the contraction in the role of public pension systems.
These developments in turn have encouraged the move towards financial globalisation, the growth in the provision of asset management services, the development of IT systems, and a sharp reduction in data transmission and communication costs. Banks, and other financial institutions, believe that they will be able to handle these developments better if they are bigger. This has led to a situation where there are a diminishing number of large financial institutions, becoming progressively larger as they acquire partners. At its simplest it is a situation where the winner eventually takes all. This is what might be termed the convergence theory of mergers and acquisitions.
Are mergers inevitable? All this activity prompts the question: are mergers inevitable?
Faced with increasing competition and shrinking profitability, do financial institutions have any option but to increase the scale and scope of their operations by acquiring other financial institutions? Is convergence of institutions inevitable in the sense that they have no choice? Must banks prey on, or be preyed upon? As a corollary to this one should also ask whether the merger phenomenon is universal. Are all mergers driven by the driven by the same imperatives – economies of scale, revenue synergies, increased market share, global reach – or do they have characters of their own?
The purpose of this report is to suggest that there is another view – that they are not inevitable. That financial institutions have another option, from full mergers to loose alliances. They also have the option of doing nothing at all – this may often prove less expensive. That there is no consensus about the inevitability of mergers is borne out by the results of a survey which was carried out for this report. Financial institutions, which had either merged, or were planning to merge, were asked whether they felt that future mergers
(not necessarily involving their own institutions) were inevitable. Some came down firmly on the side of convergence, suggesting that increasing competition, the arrival of the euro together with advances in technology meant that in future a handful of global institutions will dominate.
Some felt that the financial services industry would become polarised, with global giants at one-end and niche players at another. Small to medium players would be squeezed out. Finally, some felt that further mergers were not inevitable, and that there was room for institutions of all sizes.
Characteristics of mergers
A secondary aim of the report is to suggest that mergers are not universal in the sense that they have characteristics, which are common to all. There are at least as many differences as similarities between the merger strategies of different financial institutions. Mergers between financial institutions will have characteristics that distinguish them from other mergers.
They may be local or regional in nature, rather than national or international.
They may have a sharply defined objective, such as dominance in a particular sector of activity such as credit cards, mortgages or private banking.
They may look for value rather than market share.
These focused mergers are typically classified as aggressive: they aim to survive and thrive.
Does size matter?
Other mergers will be built around the idea that size is what really matters. They will use economies of scale and cost reductions to pay for their acquisitions. They will seek unprecedented capital strength to protect themselves from the effects of economic recession or market turmoil. These unfocused mergers are typically classified as defensive: they aim simply to survive. Which kinds of merger financial institutions choose to pursue will often determine their chances of success or failure. Studies of mergers of European financial institutions between 1988 and 1993 suggest that acquisitions that are focused on growth and size
are less likely to add value than mergers, which concentrate on profits.
For the purposes of this report two broad types of merger are characterised:
The dumb merger
The smart merger
This should not suggest that they are misconceived – although this may be the case – but merely to make the point that their aims are less focused than those of “smart mergers”. The metaphor is a military one. Financial institutions may not see their mergers in such terms, and will not consciously make a choice between the two kinds of merger themselves. It is helpful, and possibly novel, to present their merger strategies in this way. It might also enable easier prediction of their chances of success or failure.Financial institutions are faced with a choice between broadly dumb and smart. The choice they make will be determined partly by the economic and regulatory climate in which they operate and partly by the competitive pressures they face. It is their choice.
Global Survey
The survey forming the backbone of this report, and which informs the case histories, was designed to analyse the bases of these choices. Senior executives of the financial institutions hat have been involved in some of the most important mergers of 1997/98 were asked to define the objectives of their mergers and the benefits they expected from them. They were also asked to speculate about the future of the financial
services industry, both in their own country and globally. The answers they gave suggest that financial institutions are acutely conscious of the importance of “smart” mergers. Almost all respondents emphasised that growth and increased revenues are as important, if not more so, than cost cutting.
Many emphasised the importance of being a leader in a chosen field of activity. However, there was substantial support for the “dumb” merger. They argued that global customers demanded global financial services providers, and that size was the ultimate defence against recent economic upheavals. Which is likely to be proved right remains to be seen. The signs are that the “dumb” mergers are having a rougher ride
than they expected as skeletons – usually investment banking deals – are discovered in
the cupboard.
If you want Mergers and Acquisitions Dissertations, than read research papers on mergers and acquisitions and MBA Projects on Mergers and Acquisitions.
Also read article on How to Get Dissertation Writing Help on Mergers and Acquisitions by Mahasagar Publications.
