Customers and the public in general

The merger would enable the new bank to cut its’ average cuts by increased operations. The two banks specialize in different fields which indicates that a synergy effect, that is to say that the merger would increase the efficiency of the combined firm by more than the sum of its parts, would occur. In this particular example, the strength in mortgage lending of Halifax and the corporate lending skills that Bank of Scotland possesses would complement each other and result in a synergy effect. The merger would be very beneficial to the management in both companies.

Managers are more interested in the rate of growth of the firm than in its profit perfomance. Managerial theories suggest that the growth of a firm raises managerial utility by bringing higher salaries, power, status and job security to managers. Transaction related bonuses following mergers of two companies are often very substantial. Chris Gent of Vodafone received a 10 million pound reward for the Mannesmann takeover. This sort of reward is much to the shareholders’ disgust and it seems inevitable that such an occurrence is bound to happen in this case as well.

The managerial theories also suggest that fast growing firms such as the two banks in concern with growth maximizing intentions raise job security by being less prone to takeovers. There is a lot of debate as to whether mergers are really in the interest of consumers and the resulting growth in firm size will have implications for the public interest. When considering the impact of such a merger on the economy, we must look at the potential impacts of the merger on economic efficiency. The idea of economic efficiency is broken down into productive and allocative efficiency.

Productive efficiency involves the most efficient combination of resources to produce a given level of output with the least cost methods of production. The proposed merger is estimated to cut costs by 300 million pounds which would certainly improve productive efficiency. Allocative efficiency is taken to mean setting a price which corresponds to the marginal cost of production. The problem with most proposed mergers is the fact that the merger would give the new company an increased firm size with lower costs of producing output improving productive efficiency but may pull allocative efficiency in an opposite direction.

This is because the greater the market power possessed by a company of increased size, the better the opportunity for that company to charge prices above its marginal costs of production. In this case, it could mean the new bank could charge increased prices on services rendered to customers in the long run. The second aspect of the public interest would be economic welfare which involves ideas on consumer and producer surplus. Consumer surplus is the benefit to customers of being willing to pay more for a product than they actually have to in terms of market price.

It is usually shown by the area underneath the demand curve and above the ruling market price. Producer surplus is the benefit to producers of receiving a price higher than the actual price of supplying the product. The diagram above illustrates the possibility of a merger moving productive and allocative efficiencies in opposite directions. If the merger results in the new firm using its market power to raise price from P to P cutting output Q to Q and the firm cuts its costs so that MC shifts down MC due to its larger size.

In such a case, there would have to be a balance of loss of allocative efficiency against a gain in productive efficiency in order to access the overall impact on the public interest. The proposed merger has already increased the price of shares in both banks. This is usually the case when such a huge merger is being planned. Shares in each institution soared in early trading with Bank of Scotland up 54 1/2 p, more than 7% at 796 1/2p and Halifax up 48p, a 6. 5% totaling 786p. Customers in both banks would have a positive progress during the period that the merger is being discussed.

The share prices have already gone up and if one of the banks were subject to a hostile bid by a competitor trying to bust up the deal, it would just raise the price of shares even higher. In conclusion, we must try to establish whether the proposed merger would prove beneficial to customers and the public in general. The merger, if it were to go through, would have many strong points. The expertise of the two banks complement each other very well and the merger would bring improved services to customers of the two banks.

They would have the opportunity of tapping into each banks’ expertise which would mean that Bank of Scotland customers would be able to receive better advice on mortgages and Halifax customers would be able to get better credit services and a more efficiently run service. Fox-Pitt Kelton, an investment bank specializing in financial services predicts that if the merger were to go ahead, shares in the new bank could rise by as much as 15%. The merger would prove very beneficial to both banks as it would create the UKs’ fifth largest bank.

Bank of Scotland would be able to compete with the other top four banks with the backing of Halifax as it is believed that Bank of Scotland is one of the best run banks in the UK. Bank of Scotland have long been trying to penetrate the English market and this could well be achieved due to the vast number of branches that Halifax have in England. Similarly Halifax would be able to expand its mortgage lending service further north through the Bank of Scotland’ s branches in Scotland. However, the underlying fact is that the merger would give the new bank an increased market power and a higher monopoly power in a sense.

This could mean that as the new bank achieves further growth, it could begin to charge its customers higher prices for services rendered in the long run. Also, smaller banks would be facing tougher competition now and some would have to be liquidated or face the possibility of a hostile takeover as the trend to merge continues. Abbey National is currently in talks with Lloyds TSB to create the second largest bank after HSBC. All in all, the merger between Bank of Scotland and Halifax seems to have more advantages than disadvantages in my opinion, would be very good for its customers and the public in general.