Bank Mergers Often times bank mergers take place because there are too many banks, too many branches, and too many competitors. A merger is when two companies combine to form a larger more powerful firm. Many economist have opposing view points on the role that mergers play in the economy. In the past five years many mergers have occurred in the banking industry for example; Chase Manhattan and Chemical Bank, BankAmerica and NationsBank, and Banc One and First Chicago. These are only a few of the hundreds of mergers that have taken place in the past five years.
Although consolidation can make the banking industry more productive, merging and reducing expenses give only a short lived boost to earnings. In the long run we will end up with bigger banks facing the same problem, fewer and fewer people who need them. Like any other industry in today’s society the banking industry is changing. Some economist even say its becoming extinct. Bank rivals are pressing from all directions.
Commercial Loans that was once an exclusive banking industry has been invaded by companies such as GE Capital and Merrill Lynch. Over the past five years loan activity at GE Capital already one of the countries biggest lenders has climbed 11%, while the banking industry loan growth has crept along at a 3% annual rate. Or look at Merrill Lynch. Over the past year, it has originated $4.2 billion in commercial loans, equal to roughly one third of KeyCorp’s total commercial loan portfolio at the end of 1994.1 Even the consumer-loan franchise is being captured. Credit cards for instance, have been a long time profitable business for banks. That industry as well has been taken over by companies such as First USA. Since 1991, First USA, a credit card company no more than ten years old , has prospected furiously, raising its card receivables 650%, to $15 billion, during a period when growth in overall card debt grew just 36%. Since 1991, NationsBank, despite its incessant acquiring has increased total credit card receivables just 16%.2 Larger mergers create larger assets for the company, but bankers are left in the dark with what to do with those assets.
Auto dealer are prone to handle auto loans, credit cards are received through the mail, and better deals on mortgages can be provided by mortgage brokers. Lets not forget PC banking. There are online services that will search the Internet to get the best price on a CD, credit cards, consumer loans, and mortgages. Banks are beginning to find themselves competing with software companies. 1998 was by far the biggest year for takeovers. Eight of the ten biggest deals of all time happened in 1998.
This mega merger year has been stock driven. Near the peak of the last merger wave, in 1988, stock accounted for 7% of the value of deals. This year it was 67%, by far the highest level in the past decade, according to JP Morgan.3 Banking accounted for one-quarter of total deal values. Mergers have supported bank stocks significantly. In banking it seems as though bigger is better, why invest in a small company when it is going to be acquired by a larger company.
These mergers have assembled vast companies. Although stock prices are relatively high, investors see it as contributing strong currency to those companies to make larger acquisitions with. The question is are the stockholders making a profit off of these mergers or are the only people coming out of these deals wealthy the one who are making the deals. Megamergers may not be healthy for shareholders. Mark Sirower, a professor at NYU’s Stern School, tracked the stocks of 100 big companies that made major acquisitions between 1994 and 1997. On average, a year after the deal announcement, the acquires’s stock trailed the S&P 500 by 8.6%. Not only did 60 stocks under perform the market, but 32 of these posted negative returns, with prices below their level five days before the merger became public.4 We have come to recognize that in the long run these vast companies are not making any money for the shareholder.
Some of those giants–Citigroup, to name one– have watched their stock soar, but bank stocks overall have risen only 1% since January 1998, something many analysts blame on misbegotten mergers.5 Many major bank mergers that seemed to have so much potential in the stock market failed their shareholders. Big really isn’t so beautiful, these companies where transformed into powerhouses through these mergers and acquisitions. The shareholders where the farthest things from their minds, they where too preoccupied on what big deal they where going to make next. Banks began acquiring companies at over half their book value. After spending these obscure amounts of money to acquire these companies they couldn’t afford to be wrong.
Then they proceeded to pump up Wall Street with what turned out to be empty promises that new deals would generate spectacular earnings and growth. In August 1997, NationsBank slammed through the biggest U.S. deal ever. It bought Florida’s Barnett Banks for four times book value; the price ran up to $15.5 billion.6 When Banc One bought First USA back in 1997, it projected that combined earnings would rise at a lovely 16,6% clip through 2000–comfortably higher that its traditional projected growth rate. To make that happen, First USA would simply have to grow by 23%– virtually forever.
In order to justify the premium they paid7 The necessity for bank mergers is clear, there are just too many banks in the industry many whom are not strong enough to compete with the vast companies that the past mergers have created. Although I do feel these bank mergers have reach a point where they have become out of hand but, I do see the need to continue to have them. I also feel banks should start spending there finances wisely for sooner or later the banking industry is bound to dis disappear. There are way to many non bank competitors in the business, that can do the job more efficiently and at a lower rate. The Internet is a major threat to the industry if these banking companies do not invest in new technology they are going to even more customers to PC banking, software companies and Internet investing and loan companies, that provide an inexpensive ways of doing banking for them, taking out loans and mortgages for them. Bibliography Bibliography Terence P.
Pare, Clueless Bankers, Fortune Magazine, Page 150 American Express Publishing Corp. NY, NY 1995 Geoffrey Colvin Data Complied by Ann Harrington and Mary Danehy, The Year of the Mega Merger, Fortune Magazine, Page 62, American Express Publishing Corp. NY, NY 1999 Amy Kover, Big Banks Debunked, Fortune Magazine, Page 187 American Express Publishing Corp. NY, NY 2000 Economics Essays.