Mergers and Acquisitions in the UK Banking Sector - Research Paper Example

Performance Analysis of M&A in UK banking sector Table of Contents Introduction 2. Types of M & A 3. Motives for M &A 3.1 Motives for M & A in Banking Sector 4. Measurement of M&A success in banking sector 5. Determinants of M & A Success in Banking Merger 5.1 Financing- Cash and Stock 5.2 Asset Size of the Acquirer 5.3 Profit and Activity Focus 6. Conclusion 7. References 1. Introduction Mergers and Acquisitions, which are abridged as M&A, are associated with the aspect of corporate strategy, corporate finance as well as management that take up with the buying, selling and unifying of different companies which can help, finance, or support a developing business in a given industry grow speedily, thereby, having to shun the creation of another business body. Mergers and Acquisitions may construe to buying of one company by another in a friendly or hostile manner. Where a friendly acquisition interprets cooperation of companies in negotiations, a hostile acquisition or take-over may interpret a target which is reluctant to be acquired. Moreover, it is not always necessary that the target board has a preceding knowledge of the same. Mergers and Acquisitions are associated with various terminologies which aid in analyzing the subject in an efficacious manner. Although, acquisition delineates the purchase of a smaller firm by the larger one, at times, it does happen that a smaller firm takes-over the management regulation of a largely developed corporation, thereby, keeping its name for the collaborated body which can be taken to meaning as reverse take-over. Similarly, reverse-merger deals with enabling the private company which has authoritative prospects along with enthusiasm to hoist the financial purchasing a publicly cataloged shell firm, too often, the one with limited assets. The act of mergers and acquisitions is quite intricate, however, with a variety of dimensions impacting its consequences, the process of studying mergers and acquisitions becomes handy. 2. Types of M & A Usually, mergers and acquisitions are a significant part of the expansion strategy as they can be documented as horizontal deals in which the competitors are united. According to Gaughan, the $77.2 billion merger between Exxon and Mobil is one of the finest examples of a successful horizontal deal in the year 1998 (Gaughan, 2001). Horizontal mergers and acquisitions are the ones that occur between the companies generating analogous goods and offer analogous assistances. They take place quite often as a consequence of bigger companies trying to generate more efficacious economies of the scale. On the other hand, by straight away merging with the suppliers, it is possible for a company to decrement its reliance, thereby, incrementing profitability. This merger is a Vertical one, in which two companies generate different goods and services for one precise finished product. One of the perfect examples of a vertical deal is the $6.6 billion merger between Merck and Medco in the year 1993, who were a pharmaceutical manufacturer and a pharmaceutical distributor, respectively (Gaughan, 2001). Companies may also get their hands on the firms which are in entirely different industrial silhouettes. These kinds of deals can be called as conglomerate mergers which are delineated by an efficient example of Daimler Benz's deals in the aerospace industry sectors that helped replicating the premium automobile producer in to a multinational company or a conglomerate, thereby, ranking it as Europe's largest industrial company. Nevertheless, the inheritance of such companies is not much imposing, still some companies illustrated prosperity, General Electric being one of the eminent examples. Whenever companies look forward to downsizing with an opposition of expansion, they possess a variety of substitutes accessible in order to accomplish this. For it to happen, they may merely sell a division with the help of a divestiture, or may also think of a spin-off of the different elements of the entire company. It is interesting to know that when a company does so, the share-holders in the original firm usually become holders of shares in different as well as separate corporate bodies. There is yet another substitute to down-sizing which is an equity carve-out, holding an issuance of the stocks in division that are to be kept estranged from the entire company. However, a comparatively less radical substitute can be construed to issue a tracking stock that will pursue the performance of the division in argument, and nonetheless, a tracking stock may not prove to be adequate enough to meet the requirements of the market, when the market pressures for a sell off. 3. Motives for M & A Out of the significant motives for mergers and acquisitions, growth is the most common. There are practically two ways that lead to a firm's growth. The first is internal growth which can be steady and inefficacious, if at all, the firm looks forward to benefit from an opportunity in which it can seek a short-term advantage over its competitors. On the other hand, the faster substitute for merger or acquisition is to merge or acquire the essential resources in order to attain competitive targets. It is not necessary that faster development would involve comparatively more capital than internal growth, in which the corporation is supposed to invite all of the costs that the normal trial and error method would seek to inflict. Nevertheless, mergers and acquisitions prove a firm's growth to be significantly fast as compared to the internal means. Apart from growth, other motives for mergers and acquisitions may include diversification, with the help of which companies look forward to reduce their risks and exposures to certain unpredictable industry sections by adding other regions to their corporate sun-shade. Overall, diversification may be successful, but it appears to be in requirement of more skills as well as infrastructure than some corporations actually possess. Yet, not all sort of diversifications turn out inadequately. Whilst, it is rightly delineated by the research studies that the diversifications which are not associated ones, tend to generate poor consequences, associated diversifications, mergers as well as acquisitions tent to possess a more imposing track record into a field which is intimate to the acquiring corporation's prime line of business. Nonetheless, as noticed by Comment and Jarrell, apart from the research studies, other analyses have illustrated that incremented corporate centralization appears to be related to the higher share values (Comment and Jarrell, 1995: 67-79). 3.1 Motives for M & A in the Banking Sector The banking industry experiences an unparalleled gradation of consolidation on a norm that profits can accumulate with the help of expense reduction, incremented market authority as well as scale and scope economies (Pillof and Santomero, 1996). An appraisal of the writing proposes that the value gains which are suspected do not appear to verified. Bank mergers and acquisitions may hearten the improvised revenue efficaciousness in a manner that is similar to the cost efficiency. As noticed by Cline, some of the current deals such as proposed acquisition of the Boatmen's Bancshares by the NationsBank, happened to be propelled by the potential profiting in this field (Cline, 1996). In accordance to this outlook, the scale economics may allow vast banks to offer more and more products as well as services so as to increase the market share of the targeted customer actions. Moreover, an acquirement of the bank management may heighten the revenues by the implementation of superior pricing methods, thereby, offering more profitable product mixes and incurring sophisticated sales. It may also interest to know that mergers enhance values with the help of heightening the level of bank diversification where the consolidation may increment it by either widening the geographic attainment of an institution or incrementing the width of the products as well as assistances that are offered. The mere addition of new-fangled assets as well as deposits provides diversification by incrementing the count of bank customers. We have already discussed the fact that greater diversification facilitates value by stabilizing the returns and lower volatility may heighten the share-holder wealth in numerous manners. 4. Measurement of M&A success in banking sector As an efficacious component of the global marketing strategy, many big banks have mergers and acquisitions as a new-fangled gesticulate where the bank appears to form a dedicated global investment banking group to budge across the lifecycle of corporate, for example, debt organization, strategic financial advice, valuation as well as pricing examination and private equity along with the deal anatomy. It is too apparent a fact that with all these corporate structures, the banks are sure headed for a substantial development hereafter. The universal scrutiny of the merger literature arises with the argument about bank consolidation being so prevalently successful. Moreover, the equity returns signal that they have been quite intricate and if not possible, to accurately estimate. There are a number of potential advantages from the lifting of geographical hindrances to the competition in banking and the related wave of the Mergers and Acquisitions activity. These may be inclusive of increased geographical diversification and improvised competition along with the eradication of the well-established bank managers. Banks have different reasons though as to why they involve in mergers and acquisitions. Managerial incentives prove to play an important role in the business motives and with regards to the mergers that are driven by these business motives, two hypotheses can be drawn. Berger categorizes them as relative efficiency hypotheses and low efficiency hypothesis, where in relative efficiency hypothesis, the obtaining bank attempts to bring the target bank to its own heightened gradation of efficaciousness with the help of shifting its supreme management capacities or its approaches, under the low efficiency hypothesis, one of the merging bank entities or both appear to be inefficaciously relative to their gazes (Berger, 1998: 79-103). Too often, performance studies undergo a trivial selection bias which disrupts their results against mergers acquisitions. This happens in particular when they tend to put next to merging and non-merging banks. This tends to avoid the fact that merging banks delineate an under-performing example of banks, chiefly with regards to those that are the aim in a take-over. Nonetheless, if the merging collaborators are under-performing before the merger, it appears astonishing that the merger banks are less profitable than other banks, at least in the short or medium run (Behr and Heid, 2008). However, the argument is actually about whether or not the mergers have aided the banks in solving their problems in their meticulous occurrence. This can be sorted in empirical way, it is appreciated of one handles the intricacy that things influencing the inclination to merge are possibly to associate with those that settle on the profitability and efficaciousness of the banks. With regards to the performance and efficiency studies, there are a number of arguments that unfold. Too often, it is competed that the lack of market data prejudices the studies of the accounting statistics. Moreover, it is also argued that, possibly, the post-merger time span is inadequately long so as to seize the gains. Many performance gains may consume time to either be attained or be reflected in the financial statistics. However, extension of the post-merger period does not actually lessen the issue for the reason that this solution is inclusive of its own difficulties. Beyond certain realms, the examination of the merged firm relative to some gaze regulation group associates comparatively lesser to the merger itself than to the characteristic circumstances of each of the markets or firm-precise approach. There lies a limitation to the extent where the merger can be held responsible for the relative performance of the firm. 5. Determinants of M&A success in bank merger Several deal features tend to be available in the most successful deals. Whilst, some of the factors such as the way deals are financed, may have been examined in various ways, the way in which deal rationale may influence success is relatively unanalyzed. The variables that may prove to influence the merger or acquisition may include financing stats, the size of the acquirer, the deal rationale as well as the geographical location of he acquirer and the target. 5.1 Financing- Cash and Stock The way in which deals are financed delineates a lot about the economies of the companies that are involved in the collaboration process. Cash deals in comparison with stock deals have been significantly more successful and the average deals with both cash and stock are found to generate impeccable results. These results may be due to the fact that companies that finance the transactions with stocks distinguish their stock to be a cheaper currency than cash and may also construe to the fact that their stock prices have attained pinnacle, chiefly if their stock price is accompanied by a higher than the value metrics. 5.2 Asset Size of the Acquirer On an average, deals accomplished by the smaller acquirers are more successful than those accomplished by larger companies. This is due to the reason that there is a statistically important correlation between larger companies and various other constraints. Deals by smaller companies are associated with fewer acquisitions which tended to possess targets with lower value metrics. These factors tend to be associated with more successful acquirers. 5.3 Profit and Activity Focus According to Kashyap and associated scholars, banks create liquidity by altering the liquid responsibilities in to less liquid assets, whilst, others add that banks also generate liquidity through the off-balance sheet activities (Kashyap et. al, 2002). The empirical investigations of the liquidity of bank creation are not very fragile, and there is a low amount of liquidity alteration that is performed by the commercial banks. The main factors which affect the transformation in the liquidity ratios around the commercial bank mergers suggest that the higher level of deposit insurance of the pro-forma banks before merger provide higher level of liquidity creation after the mergers. The level of equity capital of the pro-forma bank before merger exemplifies the transformation around the mergers accomplished by the larger acquirers. At least in the short run, the bank mergers result in a higher gradation of liquidity creation. The short-term effectuality of an increment in the liquidity ratios around the merger accomplishments may account for the considerable share of the overall industry liquidity generation. However, the generation of liquidity may be adversely affected by the degraded level of assets, liability as well as off-balance sheet analyses which are in association with the mergers. 6. Conclusion The merger and acquisition business is a growing business across the world. This growth is associated with the economic impact of the deregulations which efficaciously turn out. Hopefully, deal makers learn from the mistakes of the prior merger deals as well as craft deals which will not be as vulnerable to the flaws of the earlier collaborations. Anecdotes on the value of bank mergers as well as acquisitions delineate a clear absurdity. On an average, there is no statistically important profit in values or performance from the merger activities. Moreover, acquired firm share-holders make profits at the expense of the acquiring firm. Accounting of the data or the market value of the equity is a matter of immense concern. References 1. Andreas, Behr and Frank Heid. 2008, The success of bank mergers revisited an assessment based on a matching strategy. Discussion Paper Series 2: Banking and Financial Studies No 06/2008. Frankfurt: Deutsche Bundesbank. 2. Berger, A. N, 1998. The efficiency effects of bank mergers and acquisition: A preliminiary look at the 1990s data. in: Amihud, Y. and G. Miller (eds.). Bank Mergers & Acquisitions. Kluwer Academic Publishers, Boston. Pp. 79-103. 3. Comment R. and G. Jarrell, 1995. Corporate Focus and Stock Returns, Journal of Financial Economics 37, no. 1. Pp.67-79. 4. Gaughan, Patrick A. 2001, Mergers and Acquisitions: An Overview. College of Business, Fairleigh Dickinson University. Economatrix Research Associates, Inc. 5. Kashyap, Anil K., Raghuram G. Rajan and Jeremy C. Stein, 2002. Banks as liquidity providers: An explanation for the coexistence of lending and deposit-taking, Journal of Finance 57. Pp. 33-73. 6. Kenneth Cline, 1996. NationsBank Sees Boatmen's Revenue Potential, American Banker (September 26, 1996). 7. Pilloff, Steven J and Anthony M. Santomero. 1996, The Value Effects of Bank Mergers and Acquisitions. Wharton School, University of Pennsylvania. Read More