Mergers and Acquisitions

The aim and objective of this dissertation is to provide an insight into the dynamics of mergers and acquisitions, with a special emphasis of this phenomenon on the UK banking sector. The primary aim of this dissertation is to find out what motivates financial organisations to merge with or acquire similar organisations and what the exact degree of influence these motivations exert. Literature available on M&A activity is primarily based on data from United States or other developed countries.

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Secondary, the aim of this dissertation is to find out whether the motivations found to be behind the wave of consolidation in the financial sector also apply to the banking sector in the UK. The author aims to accomplish this with the help of case studies based on data from the recent acquisition of National Westminster bank by the Royal Bank of Scotland and the Halifax building society merger with Bank of Scotland.

The effect of consolidation in the financial sector is another area of study related to mergers and acquisitions that the author aims to explore. This dissertation is divided into six chapters. The first chapter provides an outline of the aims of the study followed by the review of the literature pertaining to the topic of the study. The second chapter starts with a definition of mergers and acquisitions, and provides definitions of various other techniques in which financial organisations may join.

The third and fourth chapters are the apex points of this dissertation. The third chapter provides an in-depth study of the motivations behind the wave of consolidation in the financial sector (with a special emphasis on the UK financial sector) and concludes by providing the exact degree of influences found motivations exert on consolidation activity in the financial sector. The fourth chapter undertakes case studies of two of the most prominent and significant mergers in the history of the banking sector of the UK.

The case studies include the acquisition of National Westminster bank by the Royal Bank of Scotland and the merger of Halifax building society with the Bank of Scotland, which are the pivotal points of this chapter. This chapter includes a ratio analysis based on the figures and facts available in the annual reports of the respective organisations. The fifth chapter evaluates the effects of consolidation in the banking sector on the consumers, the banks themselves and the overall economy. The sixth chapter concludes this dissertation.

This section provides a brief review of the empirical literature that examines the aspect of M&A in the financial sector. A large body of literature exists related to the topic under consideration. Existing literature ranges from studies on the causes & consequences of M&A on the operating performance, stock performance, to the determinants of the premium paid for the target. Since the focus of this dissertation is confined to the motivations and effects of financial sector consolidation, it is only appropriate to discuss a selection of studies. This selection is based on the viewpoint from which the study was undertaken i. e.

theoretical studies and practitioners’ view. Theoretical studies on the subject of motivations behind the wave of consolidation in the financial sector are in consensus that there are shareholders’ value maximisation motives and shareholders’ non-value maximisation motives. Internal factors i. e. creating synergies, achieving economies of scope and scale, diversifying risk, geographical diversification and capital growth were argued to be value maximisation motives. On the other hand, managerial motives and external factors of technological advancements, deregulation and globalisation were said to be non-value maximising motives.

While there is consensus on the overall motivations, the magnitude of these motivations differs among authors. Berger, Demsetz and Strahan (1999) viewed the causes and consequences of M;A activity in the financial industry from a static as well as a dynamic point of view. The static analysis compared the financial organisations, as M;A did not happen; static analysis was carried out to provide a base to compare the results of the dynamic study. The dynamic study incorporated the changes in the financial organisations before and after consolidation.

The conclusion drawn from the static and dynamic analysis points out that the motivations of increasing market power and improving profits through geographical diversification are more significant than all the other factors influencing financial organisations to engage in mergers and acquisitions. Fotios, Tanna ; Zopounidis (2005) in a study which includes all significant mergers in the financial sector of major economies till the year 2004, emphasize on achieving economies of scale and scope and creating synergies as more influential in motivating a decision to consolidate among financial organisations.

In accordance, Heffernan (2005) undertook a study analysing the viewpoint of academics and executives related with the financial organisations engaged in M;A activity. She found that, apart from diversifying risk, geographical diversification and improving efficiencies, managerial motives of achieving higher compensation and empire building are quite significant when a decision to engage in a merger or acquisition is finalised by a financial organisation.

In contrast, practitioners’ emphasis on external factors of technological development, deregulation and globalisation to be more influential factors affecting M&A decisions in the financial sector. European Commission Economic Paper (2005) examines a range of factors that facilitate integration and consolidation in the financial sector, additionally the study assesses the level of integration both within and across national borders of the EU. These Economic Papers are written by experts in the related field or by the staff of the director general for economic and financial affairs.

Although, the Economic Paper related to causes and consequences of consolidation in the financial sector of Europe considers a range of causes and consequences, it emphasizes more on globalisation as the prime external motivator, because of its role as a promoter of all other motivations behind consolidation in the financial sector. On the other hand, A Group of ten report (2001) drafted by a working party that consisted of a task force of experts from 45 study nations, examined the fundamental causes of consolidation in the EU financial sector. The task force conducted interviews with the participants in order to ascertain the motivations.

The interviews conducted were based on a common interview guide, which the participants were asked to give their opinions on. The final report identifies achieving Economies of scale and increasing market power as the most important internal factors. Deregulation and technological innovations were identified as the most important external factors encouraging consolidation among financial organisations. European Central Bank (2006) in order to review the motives of consolidation from an industrial point of view, conducted interviews and surveys with bank supervisors. The Banking Supervision Committee (BSC) prepared the report.

The study concluded that achieving economies of scale and diversification of risk through M&A are the most influential internal factors. While, technological advancements were identified as the most important external factor motivating consolidation in the financial sector. In addition to the motivations behind consolidation in the financial sector, the effects of consolidation in the financial sector are also considered in this dissertation. The literature available on the effects of consolidation in the financial sector was found to be based primarily on the financial sector of the United States and other developed economies.

However, results from economies having a similar financial structure as that of the United Kingdom were found to be applicable. Literature reviewed in addition to the studies discussed in the previous paragraphs is in dispute on the effects of consolidation in the banking sector. Cybo-Ottone (2000) undertook an event study to examine a sample of 54 very large deals covering 13 European nations. The results indicate that in-market mergers create positive performance returns increasing the efficiency of the whole sector.

However, it was also found that M&A deals that occurred between securities firms and domestic or foreign financial organisations did not gain any positive market’s expectation. On the other hand, a study by Focarelli ; Salleo (2002) concludes that mergers seek to improve income and services, but the increase is offset by higher staff costs and other costs involved. Focarelli and Panetta (2002) in a study on the long run effects of consolidation in the banking sector find that consolidation generates adverse price changes, harming consumers.

However, these changes were found to be temporary, in the long run consolidation led to prices that are more favourable for consumers. The empirical evidence is mixed and no two studies were found to emphasize on one common motivation or effect of financial sector consolidation. A focused study on the central motivations behind consolidation and the effects of consolidation in the financial sector that provides evidence from the UK banking sector is precisely what is required.