Mergers and acquisitions are very vital in any given business environment. They are undertaken for various motives. The banking sector is a field where M&A have been on the increase, with various researchers trying to understand their extent and motives. Moreover, mergers have been key during crises as an alternative to government bailouts. This paper reviews literature on the valuation of the effect of US bank mergers over the Financial Crisis period. In so doing, the paper will analyse motives behind bank mergers, scenario to bank mergers, as well as factors influencing bank mergers. The paper concludes by examining the financial crisis and bank mergers.
Motives of Mergers
As pointed out by Calipha et al (2010), there are three primary motives of mergers. Organisations merger or acquire others to get advantage of shared resource and synergy (Porter, 1985). Another primary motive is to enter into a new market and diversify businesses with this strategy. Basically, to use M&A to enter new market and get advantage of shares resources is a managerial self-oriented strategy, as noted by Seth et al (2000). According to Campbell & Goold (1998), synergy describes the advantage of working together. When two or more organisations start working together, it creates more value than summation of value creation working alone. As argued by Carpenter and Sanders (2007), the source of synergy in an organization are reduction in threats, ability to save cost, increase market power and financial strength and influence capabilities and competencies. Campbell and Goold (1998) add that in case of M&A, synergy can be realised in organisations in form of shared know-how, shared tangible resources, pool negotiating power, coordinated strategies, vertical integration and combined business creation.
Furthermore, Gopinath (2003) observed that most of the time, companies merge and acquire to reduce their costs because through this, they achieve vertical integration and economies of scale. This results in cost saving for an organization (Calipha et al, 2010). Similarly, to increase market share, power and to enter a new market merger and acquisitions are quite attractive for organisations. As Wheelen and Hunger (2001) noted, merger and acquisition is also used as concentric and diversification strategies.
There are different reasons for the banking sector to emerge and expand in the United States three of them are given as below. The very first reason for the banking sector, as emphasized by Calipha et al (2010), is the expansion of local markets in the United States that have been developed and grown rapidly. As a result, there has been increased demand for banking services, as well as the deposit rates have been increased, hence the need to expand the banking sector. As mentioned by Wheelen and Hunger (2001), the other reason for mergers and acquisitions in the banking sector of United States is diversification. Therefore, now the banking industry has developed and expanded and there is an increase in the number of branches and offices of banks in areas where there were no branches before. According to Rhoades (1985), the third and foremost reason for the mergers in the United States is the merger activity. This is so because the banking system has expanded due to the mergers or acquiring the other banks or either entering into new market areas. Empirical findings of the research by Rhoades estimated that in 1980, almost 72% of the growth of the emerging United States’ banking entities was due to merger activities. This shows that most of the expansion of the United States’ banking sector is due to the mergers and acquisition of the other banking entities.