Economic Settings: Trends of Bank Mergers

Economic Settings: Trends of Bank Mergers

To understand the factors driving bank mergers and acquisitions trend it is necessary to examine the past of the bank system. Opening of the banks started as a protection of businesses, then as the guardians of the savings, later they have being attacked as lenders. In the time of inflation, real estate market recession of the late-80s , commercial banks survived by seeking stronger institutions as acquisition partners and trying different strategies through mergers. Thus the beginning of the merger trends of today. The prime reasons for merger are directly related to this evolution: the changed competitive climate and the earnings prospects for banks. With the changing role of non-bank competition, banks could no longer remain manageable, they needed to find ways to improve their profit picture, new products, new delivery systems, different ways of doing business. Merger become the different ways: it's obvious that a bank will improve its earnings if it purchases the earnings stream of a competitor, both eliminating competition and adding the former competitor's earnings to its own. If the purchase price for the acquired earnings stream can be offset by cost reductions resulting from the combination, the acquirer has solved some of its problem of sustaining earnings growth. However, there are some specific trends in the banking trends that have created a thriving merger market.

Financial Services Expansion: there is always desire to find revenue sources and to get into businesses that are less capital intensive than traditional banking. It was found that the largest institutions like Bank of America seeking to improve their income streams, financial services through the acquisition of investment banking companies such as the Merrill Lynch & Co. Banks are investing in leasing companies, factoring companies, consumer finance companies, etc

Bigness for Relevance: simply to get big enough to remain a relevant competitor. There are many institutions having a trouble to remain competitive. Moreover, small bank transactions are becoming less attractive since the costs and the pain of a small merger are disproportionate to the rewards for the acquirer.

Branch Purchases: many large institutions sale and purchase branches because they are expensive and not proportionately bottom line oriented. But, small community banks have grabbed up these branches for reasonable premiums to fill in their market areas and to expand their organizations rapidly so that they can stay relevant. And, as large mergers are approved by banking regulators and the Justice Department, branch divestitures are required and other institutions are given the opportunity to expand through acquisition of location and deposits.

Mergers of Equals: mergers of similar-size banks that have similar cultures and strategic visions. These types of transactions