Primary motives and rationale for Mergers and Acquisitions (M&A) in Banks
Improve efficiency and profitability
This is usually the key motivation and it seems that some analysts are convinced that an M&A deal itself equals higher profitability for the newly formed business, compared to profitability levels before the M&A took place. Surprisingly, only approximately 60-70% of the mergers succeed. A prime example is the Allianz-Dresdner Bank deal, where the merger itself brought more losses than gains. In many cases, as indicated by the Banca d’Italia study of consolidation in financial services, typically when efficient companies acquire less efficient ones they ultimately do not produce an efficient business, but rather a struggling one. Banca d’Italia, (2002) Consolidation and efficiency in the financial sector: a review of the international evidence.
Expand product offering and client base
This if often the case in domestic M&A, and bancassurance deals (such as Allianz and Dresdner) are the best example. An insurer might want to expand its product offering and add banking products in order to provide more services for its existing customers, therefore ensuring their loyalty, and attract new clients.
Expand into other geographical locations
Acquiring a foreign business is often the only way to enter a foreign marketing. An example is the acquisition of Zebank in France by Egg from the UK in 2002. Egg wanted to enter the French market after having succeeded in the UK. The only way to enter the French banking market from the UK was through acquisition of an existing and established name. The result was not at all what Egg had expected, since in January 2004 after less then two years, Egg decided to sell its stake in Zebank. The deal failed and Egg incurred substantial losses. This example shows that although it might seem that acquiring new markets should be beneficial for the business, in many cases such M&A fail for various reasons. This could be due to the problems with responding to different customer demands, problems with merging different corporate cultures, language and outside factors such as economic recession. Examples of companies that succeeded in expanding into other locations include Banco Santander, which is currently bidding for the UK mortgage bank, Abbey.
Maximize shareholder value
This is a key motivation according to many experts who have written on this area e.g. ‘The consolidation of the financial services industry: Causes, consequences and European Central Bank, (2000), ‘Mergers and acquisitions involving the EU banking industry – facts and implications’, Frankfurt am Main: ECB implications for the future’, written by Berger in 1999. However, some executives interviewed for this report dismissed this motivation saying that in reality, shareholders are the least concern for the top management who decide the finer details of the merger. Only the shareholders with the largest proportion of shares in
the company count and their interest is taken into account, according to Mr. Thomas from the Institute for Mergers and Acquisitions in Germany. Very often even the large shareholders do not want to take part in any decision-making;
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