Introduction
Merger is one of the most common business practices in the current competitive market. According to Van (2010), as firms struggle to manage challenges in the market, they find it more beneficial operating as large entities other than small business units. They get to enjoy economies of scale and other benefits associated with mergers. In the banking sector, mergers and takeovers have become very common. Large financial entities such as JP Morgan Chase Bank and Wells Fargo have expanded their operations over many countries around the world through mergers and acquisitions. This clearly demonstrates that this business strategy can help a firm gain a competitive edge over its market rivals. However, some critics argue that merger is a dangerous strategy that should be discouraged as much as possible. Kumar (2012) says that a merger of dominant players in an industry kills competition. It creates a monopoly where a single firm controls a very large market share, making it difficult for smaller players to survive. The long-term effect of such strategies is that the value offered by dominant firms will drop because they lack competition in the market. In this paper, the researcher will look at the relevance of banking mergers in the modern market.
Overview of the research
Banking industry is of critical importance to the development of a country’s economy. In the United States, the banking sector plays a critical role in facilitating trade. According to Shull and Hanweck (2001), mergers and acquisitions have become very common in the recent past. The leading financial institutions, such as JP Morgan Chase, Wells Fargo, Citibank, Bank of America, Deutsche Bank, and Bank of New York Mellon have grown to become the leading financial institutions through acquisitions. However, some critics argue that they pose serious threats to the growth of banking industry. In this study, the main focus is to determine the relevance of mergers in the banking industry. The researcher will look at both the advantages and disadvantages of using such a strategy to an economy. Both the primary and secondary sources of information will be collected in order to respond to the research questions.
Research Questions
Research questions play a very important role when conducting a research. The questions act as a guide to the researcher. They help in identifying the relevant data that directly addresses the issue under investigation.
- What is the best growth strategy that a bank should consider between merger and banking final aggregate value?
- What are the benefits of banking merger to employees, savers, businesses and the economy in general?
- What are the disadvantages of banking merger to employees, savers, businesses and the economy in general?
- The researcher seeks to find answers to the above research questions using both the primary and secondary sources of data.
Literature Review
According to Castillo and McAniff (2007), banking mergers and takeovers are some of the strategies that firms use to expand their operations. Instead of opening new branches, banks consider mergers as the best way of achieving growth. In the United States, mergers have been common for a long time. One of the first initial merger deals was signed between Berks County Trust Company and Schuylkill Valley Bank in 1923. This was a successful merger deal that helped Berks County Trust Company expand its operations to the regional market. This bank was later acquired by Wells Fargo. Another successful acquisition was between Fidelity Trust Bank and Philadelphia Trust Company. The two firms formed Fidelity-Philadelphia Trust Company in 1926. More recently in 2014, Old National Bank merged with United Bank & Trust in order to enhance their competitiveness (DePamphilis 2013, p. 78). Growth of these companies benefits the economy in many ways. These firms are able to pay higher taxes and employ more people when they grow.
Mergers in banking sector have a number of benefits to businesses, making it very popular in the current competitive market. According to Ayadi and Pujals (2005), one of the main reasons why firms consider merging is to reduce competition in the market. Sometimes the level of competition can be so high that firms may start experiencing losses. In order to reduce or even eliminate such unhealthy and unsustainable market rivalries, firms may consider merging. This makes them a single unit that can cooperate to achieve better success. They can afford to drop unsustainable competitive strategies that they were using to attract customers. Maharaj (2001) says that mergers also help firms expand without having to incur heavy costs. Mergers also help in reducing the cost of managing servers. After the merger, servers are centralised, cutting the cost by almost half. Employees also get to benefit from such mergers. They get to share the experiences and skills learnt in their respective firms.
Mergers help firms share their operational experiences in the market. According to DePamphilis (2013), firms may specialise in different aspects of banking. Many large firms are now considering merging with mortgage banks because of the expanding real estate market. Mortgage bank will not only come with a pool of customers, but also with a massive experience in this sector of the market. Shared knowledge makes new firm understand dynamics in the market in a better way than when operating as a separate entity. Gup (1989) says that mergers are also very important when it comes to sharing of risks. The recent recessions experienced in North America and Europe affected many banks. Firms can be in better positions to manage these risks when they merge. They will bring together their experiences and knowledge of dealing with market risks. They will also have a large pool of financial resources to cushion them against impact of unexpected market risks.
According to Miller and Amihud (1997), although mergers have become very popular in the banking sector, they have a number of disadvantages to the economy that should not be ignored. One of the main disadvantages of mergers is that they eliminate market competition. Healthy market competition is very important in enhancing growth of an industry and economy in general. It helps rival firms to improve their products’ quality and production methods. Through this, they become competitive firms that can thrive well not only in the local but also in the regional or international market. However, mergers kill this competition. It gives dominance to one or a few firms that find themselves in control of the larger market share. Maharaj (2001) says that such situations bring laxity. They limit creativity of businesses in managing market competition, and this inhibits their ability to compete favourably in the international market. Such businesses become vulnerable to new market entrants that have superior marketing and production strategies.
Gup (1989) says that another criticism directed against merger is that it affects customers negatively. In the current society, customers are informed and prefer having choices to make whenever they want to purchase a product. However, choices are only available in a perfect competitive market where there are many firms offering the same product. When mergers become common in an industry, then the market changes to become monopolistic in nature. This denies customer’s ability to make choices. Mergers may also have a negative impact on servers. When a firm has a number of competitors, it makes an effort to improve its servers as a way of enhancing its competitiveness in the market. However, when the competition is eliminated, they become relaxed and ignore the need to upgrade the servers.
Mergers may motivate foreign firms to flock the local market. According to Dymski (1999), competition is considered healthy when the number of suppliers is just enough to offer needed products to customers. However, when the number of suppliers exceeds demand in the market, then the price of products may drop to unsustainable levels. This makes it difficult to conduct businesses. Mergers create a wrong image about the number of players in the market. A foreign firm will easily consider entering into such a market, believing that the level of competition is very low.
What they fail to understand is that two or more firms which were initially operating independently have merged to operate as single entities. All their branches and customers remained intact during such mergers. According to Miller and Amihud (1997), mergers may sometimes be a threat to employees of a firm. After two or more firms come together as a single entity, one of initial activities done in the restructuring process is to eliminate redundancy. This means that an audit will be conducted to identify the employees doing the same jobs. Such employees will be redeployed to other departments if that is possible, or be laid-off during restructuring process.
Benefits and disadvantages discussed by the scholars present a very strong argument. It is apparent that mergers can be very beneficial to a firm in terms of expansion and reduced market competition. However, they come with consequences that may have devastating effects. As Walter (2004) says, when a merger is done correctly, then the new entity can be very successful. However, when this is done in a wrong way, it may have serious negative effects on the two firms coming together. It becomes necessary to find ways of bringing two firms together in a way that will minimise these negative consequences as much as possible (Rosenbaum & Pearl 2013, p. 34).
Importance and justification of the research
Mergers have become very common in the current business environment. Some of these mergers have been successful while others have been disastrous. Researchers have been trying to come up with a proper guidance that can be followed by firms when they consider merging. This research is important because it will enhance this body of knowledge. It will identify the existing gaps in the current literatures with a view of providing a detailed and holistic way through which firms can merge. This will help the policy makers to come up with informed decisions on issue of mergers. Future scholars will also find this report very important. It will provide them with background information on this topic that will inform their entire research. This makes it necessary to come up with a document that is comprehensive enough to meet the needs and expectations of these different stakeholders.
Methodology
When conducting research, it is always important to define an appropriate research method that will be used in data collection, analysis and presentation of the findings. This is the focus of this section of the report.
Data collection methods
In this study, the researcher will use both the primary and secondary sources of data. Secondary sources of data will be retrieved from books, journal articles, and other reliable online sources. They will act as a background of the study. Primary data will be taken from sample respondents from executives in the banking industry, government officials responsible for protecting competition within the market, and experts in the field of mergers. The researcher will use a questionnaire to collect information from the respondents. The questionnaires will be e-mailed to the participants. This decision was made because of limited time as most of the participants had tight schedules. This approach enables them to answer questions at any time they feel comfortable.
Sampling strategy
As mentioned in the section above, there will be three different groups of participants who will take part in this study. This makes it necessary to use stratified sampling strategy. Within the three strata, the researcher will use simple random sampling to identify the participants.
Data analysis
Data will be analysed both quantitatively and qualitatively. Quantitative data generated from the questionnaire will be analysed using Statistical Package for Social Scientists (SPSS). The statistical values will be supported by qualitative explanations.
Research Planning
It is necessary to define the timeline for this research project in order to plan for the time available for all activities. The project will be completed within the next five weeks. Gantt chart below shows the activities in the project and their timeline.
Timeline of Project Activities
As shown in the above Gantt chart, the entire research project is expected to take five weeks to be completed. Each of the project activities has a set timeline. However, it is important to note that some of them may be completed earlier than the set timeline. All weekends have not been considered as working days in this project. It means that a week has five working days in this plan. The first activity in the schedule is the development and approval of the proposal. The proposal will have to be approved before the researcher can start the process of collecting primary data. In the second week, the researcher will collect and review relevant literature from different sources. This will be followed by primary data collection. Analysis of primary data will be done before writing the entire report.
Hypothesis
The researcher has developed research hypotheses that will be confirmed through analysis of primary data. They include the following.
- H 1 Mergers are beneficial to banks if they follow the right procedures
- H 2 Mergers reduce market competition significantly
- H 3 Mergers can negatively affect banking industry if they are not controlled.
List of References
Ayadi, R & Pujals, G 2005, Banking mergers and acquisitions in the EU: Overview, assessment and prospects, SUERF, Vienna.
Castillo, J & McAniff, P 2007, The practitioner’s guide to investment banking, mergers & acquisitions, corporate finance, Circinus Business Press, Solana Beach.
DePamphilis, D 2013, Mergers, acquisitions, and other restructuring activities: An integrated approach to process, tools, cases, and solutions, Cengage, New York.
Dymski, G 1999, The bank merger wave: The economic causes and social consequences of financial consolidation, Sharpe, Armonk.
Gup, B 1989, Bank Mergers: Current Issues and Perspectives, Springer, Dordrecht.
Kumar, B 2012, Mega mergers and acquisitions: Case studies from key industries, Palgrave Macmillan, Hampshire.
Maharaj, A 2001, Bank mergers and acquisitions in the United States, 1990-1997: An analysis of shareholders value creation and premium paid to integrate with megabanks, McMillan, London.
Miller, G & Amihud, Y 1997, Bank mergers & acquisitions: An introduction and an overview, Kluwer, Boston.
Rosenbaum, J & Pearl, J 2013, Investment banking: Valuation, leveraged buyouts, and mergers &acquisitions, Wiley, Hoboken.
Shull, B & Hanweck, G 2001, Bank mergers in a deregulated environment: Promise and peril, Quorum Books, Westport.
Van, H 2010, The industrial organisation of banking: Bank behaviour, market structure, and regulation, Springer, Berlin.
Walter, I 2004, Mergers and acquisitions in banking and finance: What works, what fails, and why, Oxford University Press, New York.