M&A in the Banking Industry

During the early 1990s, an unprecedented wave of consolidation moved through the banking industry which was accomplished through internal restructuring (rationalization of facilities, downsizing of personnel and other cost-reduction measures) and through mergers and acquisitions. That process continued during 1994 and 1995. This research examines three transactions which occurred during this time, and considers the effect of the mergers on the financial institutions involved.

More than 50 mergers involving publicly traded banks took place in 1993 totaling more than $22.5 billion. Bank mergers continued strong in 1994, jumping to a value of $7.94 billion in the third quarter. Bank mergers have been common since the late 1800s, but the recent bank merger mania can be attributed to several current factors, including competition, stagnant stock prices and government policies.

Banks now face a number of large competitors both in their domestic and international markets. These competitors include banks, securities and investment banking firms, insurance companies, and large financial service firms. The banking industry has, in fact, been in a consolidation mode for the past several years, driven by the need to reduce costs and eliminate overcapacity.

During late 1994 and early 1995, bank stock prices were static due, in part, to concern over the impact of the Mexican economic situation and higher interest rates. This

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ders. Chase's stock increased to $37 when the announcement was made, but has since dropped by approximately 10 percent. U.S. Trust increased by 10 points when the announcement was made in early 1995 over its price six months earlier. For its part, Chase announced that the merger will resulting an additional $4 million in 1995 profits, $22 million in 1996, and $49 million in 2000. Approximately nine percent of U.S. Trust's employees will be laid off in the United States as a result of the merger over the same period. Conclusion Growth through acquisition is a time-honored way for companies to expand their markets and enter new markets. The thrift industry in the United States has largely been prevented from pursuing this strategy because of government regulation regarding the industry, but recent deregulation has led to a dramatic increase in the number and types of acquisition. The stock of acquiring companies tends to drop, or remain stagnant, when such mergers are announced, while the stock of target companies tends to increase. It can be expected that the environment which has led to this increase in merger activity will continue for the short-term, with additional acquisitions on the horizon. Bibliography Bigga

Category: Economics - M